Defending Government Pharmaceutical Fraud Investigations: Assessing

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Defending Government Pharmaceutical Fraud Investigations: Assessing
Strategic Options
By Katherine A. Lauer1
In the world of state and federal health care fraud investigations and prosecutions, business is booming.
Over the past five years, the government has extracted enormous monetary payments in exchange for
agreements not to exclude providers, suppliers and manufacturers from the Medicare and Medicaid
programs – a corporate death sentence for most health care entities. The Office of the Inspector General
(“OIG”), which works cooperatively with the Department of Justice, the Federal Bureau of Investigation,
and other governmental departments in investigating allegations of civil, criminal, and administrative
wrongdoing in Health and Human Services programs, reports that in fiscal year 2006, it recovered $1.6
billion in investigative efforts, excluded 3,425 individuals and entities for fraud and abuse, and instituted
472 criminal actions and 272 civil actions against providers and others.2
Individual states have also been exacting high penalties from health care providers, suppliers and
manufacturers for alleged fraud and abuse related to the Medicaid program. State Attorneys General,
acutely aware of both the high costs of health care and the potential to recover some of that cost through
prosecutions or civil demands, are becoming increasingly proactive in investigating potential fraud and
abuse issues. While individual Medicaid Fraud Control Units (“MFCUs”) have tended to focus on the
investigation and prosecution of individual health care providers, they have also proven effective partners
with each other and with federal agencies. There are now active state-federal health care fraud task forces
and working groups in virtually every state, in which MCFUs participate either directly or through the
National Association of Medicaid Fraud Control Units.3 As a result of this coordinated effort, individual
state Medicaid programs have been able to share in the billions of dollars recovered in global settlements
with pharmaceutical companies, pharmacy chains, and other national providers.
But even as average settlement amounts increase, it has become less and less possible to appease the
government through restitution alone. The government zest for non-monetary punishment continues to
increase, as does the introduction of new investigative tactics. Both Gambro Healthcare and Serono
agreed to settlements that required guilty pleas and exclusion for their subsidiary companies (five years
exclusion for Serono Labs, Inc., and permanent exclusion for Gambro Supply Co.). And while the
government has continued to push its theories of liability into new market segments (e.g., the
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Caremark/AdvancePCS matter), it has also begun to apply hotly-debated policies and practices from other
law enforcement areas to the health care context.
These enforcement trends underscore the need for sophisticated assessment of defense strategy that
consider various options.
I. Statutory Framework of Pharmaceutical Fraud Investigations
In order to appreciate the significance of government enforcement efforts, and, more importantly, in order
to understand the financial risks posed by the various criminal, civil and administrative remedies
available, it is critical to have an understanding of the fraud and abuse statutes upon which the
government relies in pursuing its investigations against pharmaceutical manufacturers. The following
briefly outlines the primary weapons in the government’s arsenal.
A. Off-Label Marketing and Kickbacks
For 2007, the OIG has once again identified the broad category of pharmaceutical fraud as one of its main
investigative focus areas.4 In the past, such cases have tended to involve allegations of false claims
“caused” by inappropriate or illegal marketing practices, such as offering or paying kickbacks in
exchange for agreements to purchase a particular drug, or marketing a drug for uses that have not been
approved by the Food and Drug Administration (“FDA”). The statues implicated by this conduct – the
Anti-kickback Statute and the Food, Drug, and Cosmetic Act5 – are sufficiently malleable that defense
counsel are constantly challenged in effectively advocating the client’s good faith attempts to comply
with the law.
1. The Federal Anti-kickback Statute
The Anti-kickback Statute (“AKS”) prohibits anyone from knowingly or willfully paying or offering to
pay remuneration, directly or indirectly, to another to induce that person to refer patients, or to arrange for
or recommend the purchase of any facility, item or service that may be paid for by a federal health care
program. It also prohibits the acceptance of such remuneration. A violation of the AKS is a felony offense
punishable by a maximum sentence of five years and exclusion from federal health care programs. The
Act further provides for civil penalties of $50,000 for each violation plus three times the remuneration
offered, paid, solicited or received.6 Courts have disagreed as to whether the AKS’s “willful” intent
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standard requires proof of specific intent to violate the Statute, mere knowledge that the act was unlawful,
or whether willful intent can be inferred if any purpose of the remuneration was to induce a referral.
Prescription drug marketing practices that improperly affect medical decision-making are well within the
reach of the Anti-kickback Statute’s prohibitions. Prescription drugs are covered under a variety of
federal programs. The Medicare program covers prescription drugs furnished to inpatients of hospitals,
nursing homes and hospice patients under Part A of the Medicare program, and payment for such drugs is
included within the facility’s DRG payment rates. Medicare Part B covers few drugs on an outpatient
basis, although certain enumerated drugs are covered. In contrast, the Medicaid statute allows states to
cover outpatient prescription drugs, and all states have chosen to provide such coverage.7 Prescription
drug coverage is also provided under the Civilian Health and Medical Program for the Uniformed
Services (“CHAMPUS”).8 As discussed below, the new Medicare Part D drug benefit program is
perceived by the Government to bring a host of new opportunities for fraud and abuse.
While concerns about increased cost and overutilization underlie the Anti-kickback Statute’s prohibitions,
neither factor is required for a statutory violation to occur. Rather, it is enough if a improper incentives
impair a physician’s judgment so that the best interest of the patient no longer controls his decisionmaking.
To this end, prescription drug marketing programs that encourage physicians to prescribe a
manufacturer’s product – not because it has any advantages for the patient – but because the physician
feels an obligation to do so in exchange for a gift, violate the statute. Similarly, incentives may cause
physicians to order newer, more expensive drugs without any medical justification, or even more of a
particular drug than is necessary to treat the patient’s condition. In each case, the medical judgment of the
physician has been corrupted and the Anti-kickback Statute is implicated.
2. Off-label Marketing
The Food, Drug, and Cosmetic Act9 prohibits the introduction of any food, drug, device, or cosmetic that
is adulterated or misbranded into interstate commerce. A drug or device is “misbranded” under the FDCA
if, among other things, it contains a false or misleading label, or if the package fails to contain adequate
directions and warnings for proper use.10
In addition to exercising authority over drugs and devices and their accompanying literature, the FDA
limits the ability of manufacturers to market their products for unapproved uses. Thus, although
physicians are free to prescribe drugs for unapproved uses, manufacturers are not allowed to promote
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such uses, and may only disseminate information about unapproved uses in response to unsolicited
requests from practitioners or pursuant to narrow parameters set forth by statute.11
There is no intent requirement for distributing a misbranded drug or device, and it does not matter
whether the statements regarding the drug or device’s unapproved uses were, in fact, scientifically
accurate. As a result, statutory penalties for violating the FDCA’s prohibitions on marketing and selling
misbranded drugs are not particularly steep, and a first time offense is considered a misdemeanor under
the statute in the absence of an intent to defraud. That is not to suggest that the penalties actually imposed
for FDCA violations have been minor. To the contrary, FDCA prosecutions have reaped record-making
settlements from pharmaceutical corporations that have admitted to engaging in off-label promotion.
Although criminal sanctions for misbranding or off-label promotion have existed for decades,
prosecutions for violations of those statutes had been rare. The FDA’s historical practice was to deal with
off-label promotion issues primarily through warning letters and other administrative actions. That
landscape has now changed with the entry of a new “regulator” – the Department of Justice. Driven in
part by a wave of qui tam filings, off-label has now become a burning issue in the world of health care
fraud enforcement.
B. Pharmaceutical Pricing and Medicare Reimbursement
Another major aspect of pharmaceutical cases in the past has involved allegations of misconduct with
respect to drug pricing. Beginning in the late 1990s, the government began investigating drug company
reports of “average wholesale prices” or “AWPs,” which at the time provided the benchmark for
Medicare reimbursement amounts. Despite numerous indications that the government has always been
aware of the disparity between reported AWPs and the prices actually paid to purchase drugs, allegations
of “fraudulent” pricing continued to bring some prosecutorial success to the government in the last few
years, at least insofar as settlement is concerned.12
AWP-based inquiries are destined to decrease, if for no other reason than the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the “MMA”) replaced AWP with “averages sales price”
(“ASP”) as Medicare’s reimbursement benchmark.13 This is not to say, however, that investigations into
pharmaceutical pricing decisions are a thing of the past. To the contrary, unlike the prior AWP-based
reimbursement system, the MMA mandates both that pharmaceutical companies report accurate ASP
information to CMS and that the OIG conduct surveys into companies’ methodologies for computing
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ASPs. The OIG has already noticed that “the reported average sales prices for certain drugs have been
rising,” a trend it intends to examine in 2007, thus paving the way for a new round of price disputes.14
C. Best Price and Medicaid Rebates
In addition, pharmaceutical companies are still obligated to pay rebates to the Medicaid program based
upon the “average manufacturer’s price” (“AMP”) and the “best price” of each drug for a given quarter.15
The government has continued its success with allegations of best price violations, such as that achieved
in November 2005, when King Pharmaceuticals paid $125 million to resolve allegations that it had
knowingly failed to accurately calculate its products’ AMPs and best prices in order to pay less money in
rebates to Medicaid.16 The OIG intends to continue evaluating the adequacy of best price calculations “to
determine whether drug manufacturers are circumventing the requirements of the Medicaid drug rebate
legislation.”17
D. Medicare Part D
Finally, January 1, 2006, marked the implementation of Medicare Part D, the new drug benefit program
established by the MMA for Medicare beneficiaries. By all accounts, Part D represents a whole new
frontier in potential health care fraud. Under Part D, Medicare beneficiaries can choose to participate
either in prescription drug plans (“PDPs”), or join Medicare Advantage or Medicare health plans through
which they can obtain coverage for prescribed drugs. These new arrangements are expected to intensify
the competition between pharmacists and pharmacy benefits managers (“PBMs”), which negotiate lower
drug prices directly from manufacturers for participants of client health care plans.18 They will also
present numerous opportunities for fraud and abuse, including potential kickbacks between PBMs and
PDPs in exchange for favorable contract or formulary decisions and False Claims Act liability for
marketing and pricing abuses. The OIG has already taken the position that “[b]ecause of the business
relationships that will be formed under Part D, [it] is anticipating violations such as kickbacks, billing for
services not rendered, false statements, prescription shorting in institutional settings, and telephone scams
. . . .” To prospectively address such issues, the OIG has established a specially trained team of Special
Agents dedicated to investigating potential Part D violations. 19
II. Statutory Violations as False Claims
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The False Claims Act (the “FCA”) is the principal weapon used by the Department of Justice (the “DOJ”)
in pursuing civil fraud for pharmaceutical marketing practices, often on a parallel track to criminal
prosecution under the AKS or the FDCA. Government investigations based on pharmaceutical marketing
practices almost always proceed under the civil FCA, as the statute allows the government to recover not
only from those providers who actually submit false claims, but from other entities such as
pharmaceutical and device manufacturers who cause false claims to be submitted. The statute applies
broadly to virtually all monetary claims submitted to federal programs, including claims for
reimbursement under the various federal healthcare benefit programs including Medicare and Medicaid.
An actionable claim must be submitted to the government, directly or indirectly, the claim must be false
or fraudulent (the falsity element) and the claim must have been submitted with knowledge of that falsity.
In the event that the government (or a whistleblower, known as a “relator” acting in the name of the
United States) prevails in an FCA action, the government is entitled to treble damages plus a statutory
penalty of $5,500- $11,000 per claim submitted, and the relator gets a percentage of the recovery as
well.20 Thus, the real monetary risk in most pharmaceutical investigations lies not in a finding of criminal
liability, but in the treble damages and per-claim penalties provided for under the FCA. Virtually every
major pharmaceutical investigation settlement has involved the government’s assertion of claims under
the FCA based on improper marketing behavior that allegedly involves illegal kickbacks and/or off-label
promotion.
A. Anti-kickback Statute Violations as False Claims
Historically, there has been some question as to whether violations of the Anti-kickback Statute can form
the basis of a False Claims Act case. The False Claims Act does not render as actionable every claim
submitted by a government contractor whose performance did not comply completely with each and
every contractual and regulatory provision. To the extent that, for example, a referral that would be
unlawful under the AKS resulted in the provision of inpatient medical care or the prescription of a drug
that was completely medically appropriate and properly provided, the claim submitted for reimbursement
would not, on its face, be false. The government has nonetheless successfully argued that the submission
of such claims can form the basis of an FCA action, and will vigorously defend any attempt by defendants
to convince a court otherwise. The government takes the position that FCA liability will attach for a
statute or regulatory violation when compliance with the statute or regulation affects the provider’s
entitlement to payment from a federal program. The government argues that the nexus between payment
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and compliance with the AKS creates FCA liability for violations, and has successfully survived motions
to dismiss on that basis.
In the past few years, several FCA cases have been filed against providers based at least in part on alleged
violations of the Anti-kickback Statute. Those courts allowing such claims to proceed past the pleading
stage have relied on two related theories – express certification and implied certification. Some cases, like
United States ex rel. Pogue v. American Healthcorp, Inc. (“Pogue I”), relied on the theory that the
provider implicitly certifies compliance with federal health care fraud and abuse statutes by virtue of its
participation in the federal Medicare program, rendering claims submitted on referrals tainted by illegal
kickbacks false.21 Other cases, like United States ex rel. Thompson v. Columbia/HCA Healthcare Corp,
relied on allegations that the explicit certification contained in Medicare Cost Reports constitutes an
actionable false claim if there is an underlying violation of the AKS.22
Because FCA liability will attach to a defendant’s alleged failure to comply with a particular statute or
regulation that has a sufficient nexus to payment to render him ineligible to receive or retain the payment
claimed from the United States, the government takes the position that a violation of the AKS can give
rise to liability under the FCA. Four recent decisions have specifically agreed with the government’s
position that compliance with the AKS is a prerequisite to payment of federal funds and therefore can
form the basis for an FCA claim.23 In each case, the United States convinced the court that the Social
Security Act itself establishes that compliance with the AKS is a prerequisite to a provider’s right to
receive or retain federal funds. While this has been the dominant trend in the case law, there have been
two district court decisions that rejected the notion of applying the FCA to the AKS.24 Although this issue
has not been finally resolved in all circuits, the prevailing trend is in the government’s favor.
B. Off-lable Promotion as False Claims
The courts seem to have had less trouble finding that off-label promotion can form the predicate act for an
action under the FCA. In the first major case implicating the issue, United States ex rel. Franklin v.
Parke-Davis, the court soundly rejected the defendant’s arguments that the relator could not prove either
the existence of a false claim or that defendant’s off-label promotion had caused false claims to be
submitted. The court first found that the FCA does not require that the relator demonstrate that the
defendant’s marketing presentations contained any false statements in order to induce physicians to
prescribe the drug for off-label uses. The court then disposed of defendant’s argument that the submission
of a claim for a drug prescribed for an off-label use is not a false claim because the Medicaid statute gives
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the states the discretion to provide reimbursement for off-label prescriptions. Because at least eight state
Medicaid programs specifically exclude reimbursement for off-label prescriptions, the court found that
compliance with the restrictions of on off-label marketing was a condition precedent to reimbursement in
those states, and went on to conclude that a request for reimbursement of a non-covered drug is a false
claim. Finally, the court ruled that the relator had presented evidence both of direct (or “actual”) causation
in the form of rates of off-label prescriptions both before and after Parke-Davis’ off-label marketing
efforts and “legal” causation because it was foreseeable that Parke-Davis’ off-label marketing efforts
would lead to off-label prescriptions and the subsequent submission of claims to federal healthcare
programs. 25
For these reasons, it may not be a productive litigation or settlement strategy to challenge the ability of
the government to pursue these claims based on illegal kickbacks or off-label promotion under the FCA.
Rather than challenging the applicability of the FCA, it will likely be more productive for pharmaceutical
companies under investigation for improper marketing practices to focus on the hurdles that the
government will have to clear to meet the FCA’s elements.
III. Challenging Falsity
To establish liability under the FCA, the government must establish: (1) that the defendant knowingly
presented or caused to be presented a claim to the United States for payment or approval; (2) that the
claim was false or fraudulent; and (3) that the defendant knew that the claim was false or fraudulent.26
The inherent ambiguities of many healthcare statutory and regulatory schemes may make this a difficult
burden.
Ultimately it is the government’s burden under the FCA to establish that claims are knowingly “false.” In
statutory enforcement actions, this will require proof that the claims at issue were in fact submitted in
violation of the underlying statutory prohibitions – either AKS’s inducement prohibitions or, in the case
of off-label marketing, the prohibitions of the FDCA – and were not protected by a safe harbor. When the
falsity of a claim is based upon a violation of statute or contract, the government has the burden of
establishing that the representations are false under any reasonable interpretation of the underlying
statute or contract.27 Recent case law affirms that this standard applies in the context of complex
Medicare regulations.
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The Eleventh Circuit’s decision in United States v. Whiteside confirms that the government has the
burden to show that statements concerning compliance with complex Medicare statutory schemes are
false under any reasonable interpretation of the rules. Whiteside overturned the false statement
convictions of two hospital executives in connection with the submission of Medicare cost reports.
Whiteside involved a single allegedly false statement classifying debt interest as 100% capital-related on
cost reports submitted to the government for reimbursement. The government contended that the
classification of the interest expense based on how the debt was being used at the time of the filing of the
cost report, rather than how the funds were used at the time of the loan origination, was inconsistent with
the Medicare regulations. The defendants responded that no Medicare regulation or other authority exists
that indicates that this characterization of debt interest was incorrect, much less “knowingly and willfully”
false. “In sum,” the court explained, “defendants contend that the government failed to prove that the
statements at issue were not a reasonable interpretation of ambiguous Medicare reimbursement
requirements; thus, the government failed to prove the statements were knowingly and willfully false.” 28
The court first laid out the government’s burden:
“In a case where the truth or falsity of a statement centers on an interpretive question of law, the
government bears the burden of proving beyond a reasonable doubt that the defendant’s statement is not
true under a reasonable interpretation of the law. United States v. Migliaccio, 34 F.3d 1517, 1525 (10th
Cir. 1994) (holding that the government bears the burden to negate any reasonable interpretations that
would make the defendant’s statement correct); United States v. Johnson, 937 F.2d 392, 399 (8th Cir.
1991) (holding that one cannot be guilty of a false statement beyond a reasonable doubt when his
statement is a reasonable construction); United States v. Race, 632 F.2d 1114, 1120 (4th Cir. 1980)
(same); United States v. Anderson, 579 F.2d 455, 460 (8th Cir. 1978) (same); see also United States v.
Calhoon, 97 F.3d 518, 526 (11th Cir. 1996) (noting that even though the Medicare regulations were clear
regarding the royalty fees paid to a related party, the government failed to establish as a matter of fact that
the fees claimed were actually in excess of what was clearly allowed under the regulations, and thus, had
‘failed to sustain its burden to prove the claim false by virtue of the nonreimbursable nature of the
interest’).”29
The Eleventh Circuit went on to find that the government could not meet its burden because “no Medicare
regulation, administrative ruling, or judicial decision exists” clearly requiring the treatment urged by the
government. It found the pertinent regulation failed to explain how to define the underlying debt for
purposes of cost report treatment and concluded that the regulation was ambiguous and subject to
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differing interpretations. It referred to testimony from government witnesses and agency publications
suggesting that the regulation at issue “can be interpreted different ways,” and that the defendants’’
interpretation was not unreasonable.30
Ultimately, the court concluded that the government had failed to meet its burden of proving the
statements false:
“Neither the regulations nor administrative authority clearly answer the dilemma the defendants faced
here. As the [Fiscal Intermediary] testified, under current law, reasonable people could differ as to
whether the debt interest was capital-related. The testimony indicates that the experts disagreed as to the
validity of the theory of capital reimbursement suggested by the government. This contradictory evidence
lends credence to defendants’’ argument that their interpretation was not unreasonable. Here, ‘competing
interpretations of the applicable law [are] far too reasonable to justify these convictions.’ United States v.
Mallas, 762 F.2d 361, 363 (4th Cir. 1985). As such, the government failed to meet its burden of proving
the actus reus of the offense – actual falsity as a matter of law.”31
This analytical framework is equally applicable in a civil FCA action. In Hagood v. Sonoma County
Water Agency,32 the court was presented with allegations of violations of the FCA based upon the manner
in which various costs allocations were made under a contract with the Army Corps of Engineers. Noting
that there were both statutory and contractual ambiguities with respect to the cost allocation issue, the
court granted summary judgment dismissing the allegations under the FCA due to the government’s
failure to establish “falsity,” stating:
“Even viewing Hagood’s evidence in the most favorable light, that evidence shows only a disputed legal
issue; that is not enough to support a reasonable inference that the allocation was false within the meaning
of the false claims act.”33
Similarly, United States ex. rel. Swafford v. Borgess Medical Center involved allegations under the FCA
relating to whether physicians’’ involvement in the interpretation of certain diagnostic tests was sufficient
to permit them to bill Medicare. Noting a lack of clarity in the requirements for such billings, the court, on
a motion for summary judgment, dismissed the action stating:
“A defendant’s decision in the face of a dispute over the requirements of governing regulations is
insufficient, without more, to constitute falsity.” 34
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IV. Challenging Intent
A. Challenging the Intent Elements of the Anti-kickback Statute
In order to successfully prosecute a pharmaceutical manufacturer of illegal kickbacks – and in order to
use the FCA to recover civilly for such violations – the government needs to prove that the defendant
acted with the required mental state. The AKS contains two scienter requirements. One is the “standard
requirement of knowing and willful acts.”35 The key to an AKS conviction, however, is the second,
specific scienter requirement, that requires that the offer or payment of remuneration be made with the
intent to induce referrals.36 Both of these scienter requirements play a role in focusing the AKS on
conduct deserving of criminal and civil punishment, while at the same time protecting those who enter
into financial arrangements with referral sources without the required mental state.
1. Knowing and Willfully Violating the Law
In 1980, Congress responded to the concern that “criminal penalties may be imposed under [the AKS] to
an individual whose conduct, while improper, was inadvertent,”37 by adding that acts committed in
violation of the AKS must be performed “knowingly and willfully.”38 AKS cases occurring soon after this
amendment seemed to interpret the addition of the “knowingly and willfully” scienter requirement as
simply stating that a defendant’s actions in paying remunerations to induce referrals must be performed
knowingly and willfully.39 In 1994, however, the United States Supreme Court, in Ratzlaf v. United
States, interpreted the willfulness provision of the anti-structuring provisions of the Money Laundering
Control Act of 1986 to require that the government prove that the defendant knew that his conduct was
unlawful.40
Following this Supreme Court precedent, the Ninth Circuit declared in Hanlester Network v. Shalala that
in order to prove that a defendant violated the AKS knowingly and willfully, the government must prove:
(1) that the defendant knew that the AKS prohibits offering or paying remuneration to induce referrals;
and (2) that the defendant engaged in this prohibited conduct with the specific intent to disobey the law.
In Hanlester, the Department of Health and Human Services (“HHS”) brought a civil action to exclude
certain individual and corporate defendants from participating in Medicare and Medicaid, alleging
violations of the AKS. The allegations included that parties associated with Hanlester Network offered or
paid remuneration to physician limited partners, who were in a position to order substantial quantities of
laboratory tests, in order to induce referrals to limited partner laboratories. The Ninth Circuit upheld
HHS’s ruling that the AKS was violated only with regard to the one individual defendant that substantial
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evidence showed acted with knowledge that her conduct was unlawful, and with the specific intent to
disobey the law. 41
The Fifth Circuit, in United States v. Davis, held that Hanlester “requires knowledge only that the
conduct in question was unlawful, and not necessarily knowledge of which particular statute makes the
conduct unlawful.” Without deciding if the AKS requires such a heightened scienter requirement, the
Davis court ruled that jury instructions defining knowingly as meaning “that the act was done voluntarily
and intentionally, not because of mistake or accident,” and defining willfully as meaning “that the act was
committed voluntarily and purposely with the specific intent to do something the law forbids; that is to
say, with bad purpose either to disobey or disregard the law,” met the Hanlester heightened scienter
requirement. 42
Other Appellate Courts that have interpreted the “knowingly and willfully” requirement of the AKS agree
it requires more than simply acting in a voluntary and conscious manner, but have stopped short of
Hanlester’s ruling that ignorance of the law is a defense against actions under the statute. In United States
v. Jain, the Eighth Circuit affirmed the district court’s adoption of a middle ground between these two
positions, requiring that the defendant knowingly behave in a matter that is unjustifiable and wrongful.
The court found Congress’s concern that inadvertent behavior might be penalized, which led them to add
the “knowingly and willfully” element to the AKS, and Congress’s creation of elaborate “safe harbor”
provisions, confirm that the AKS potentially penalizes conduct that is not “obviously nefarious.” “Only
conduct that is inevitably nefarious, that is, obviously evil or inherently bad, warrants the traditional
presumption that anyone consciously engaging in it has fair warning of a criminal violation.” Therefore,
the Eighth Circuit held that a heightened mens rea burden for the AKS is appropriate.
The Eight Circuit also found, however, that as opposed to the statute at issue in Ratzlaf that prohibited
willful violations of another anti-structuring statute, the AKS prohibits the willful performance of a series
of prohibited acts. This led the court to rule that the plain language of the AKS, and respect for the
traditional principle that ignorance of the law is no defense, suggest that the heightened mens rea standard
should only require proof that the defendant knew his conduct was wrongful. 43 The Eleventh Circuit, in
United States v. Starks, reached a similar conclusion.44
2. Intent to Induce Referrals
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The AKS prohibits the offering or paying of remuneration with the specific intent to induce referrals.45
The phrase “to induce” was interpreted in a jury instruction quoted in United States v. McClatchey to
mean “the intent to gain influence over the reason or judgment of a person making referral decisions.”
The Tenth Circuit explained that a hospital or an individual “may lawfully enter into a business
relationship with a doctor and even hope for or expect referrals from that doctor” without intending to
induce referrals. The court distinguished the situation where a defendant offers or pays remuneration to a
person with the capacity to make referrals back to the defendant, with an intent to gain influence over the
reason or judgment of the referring party, with the situation where a defendant merely hopes, or believes,
or expects that referrals may ensue from remuneration designed for wholly other purposes. 46 Under this
formulation of the law, if a defendant offers or pays remuneration with the former intent, he has violated
the AKS, but if he offers or pays remuneration with the latter intent, he is immune from conviction.
3. The “One Purpose” Test
Courts have suggested that the protection offered by the AKS would be vitiated if a party could avoid
violating the statute by funneling payments through an otherwise legitimate services arrangement – by
paying excessive remuneration over and above fair market value for legitimate consulting services, for
example – even when the excessive portion of the remuneration was intended as an inducement for
referrals. This was the situation raised in United States v. Greber. In Greber, the defendant paid
“interpretation fees” to referring physicians to compensate them for their initial consultation and for
explaining the results of Holter monitor testing. The fees paid were more than Medicare allowed for such
services, and were sometimes paid when the defendant himself evaluated the monitoring data for the
patients. The defendant argued that “absent a showing that the only purpose behind the fee was to
improperly induce future services, compensating a physician for services actually rendered could not be a
violation of the [AKS].” The Third Circuit rejected this argument, holding that if remuneration is intended
to induce referrals, “the [AKS is] violated, even if the payments were also intended to compensate for
professional services.” The court summarized this holding in the opinion’s first paragraph by stating, “We
. . . hold that if one purpose of the payment was to induce future referrals, the medicare [sic] statute has
been violated.”47 A similar argument, that an AKS conviction requires a finding that remuneration was
paid for no other purpose than inducing the referral of Medicare patients, was rejected in Davis.48
The First Circuit went even farther, and held in United States v. Bay State Ambulance & Hosp. Rental
Serv. that it is not necessary for a defendant to overpay a referring party to be found guilty of violating the
AKS since the gravamen of an AKS violation is inducement. The court then considered whether the intent
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to induce had to be the sole intent or the primary intent in order to trigger a violation of the AKS, or if any
intent to induce is enough. Although it chose not to decide if a lesser showing of intent would be
sufficient, the court held that a finding that a defendant acted with the primary purpose of inducing an act
prohibited by the AKS is sufficient to meet the intent element envisioned by Congress.49
In United States v. Kats, a defendant was convicted of accepting kickbacks in violation of the “solicitation
or receipt” portion of the AKS. The District Court charged the jury that:
“The government must prove beyond reasonable doubt that one of the purposes for the solicitation of a
remuneration was to obtain money for the referral of services which may be paid in whole or in part out
of Medicare funds. It is not a defense that there might have been other reasons for the solicitation of a
remuneration by the defendants, if you find beyond reasonable doubt that one of the material purposes for
the solicitation was to obtain money for the referral of services. It is entirely up to you to decide whether
the solicitation of a remuneration was, at least in material part, for the referral of services.” 50
The District Court further instructed the jury that a “kickback,” for purposes of the “solicitation or
receipt” portion of the AKS, consists of “a payment for granting assistance to one in a position to control
a source of income, unless such payment is wholly and not incidentally attributable to the delivery of
goods or services.”51
As discussed above, the Tenth Circuit, in McClatchey, defined the AKS’s phrase “to induce” to mean “to
offer or pay remuneration with the intent to gain influence over the reason or judgment of a person
making referral decisions.” The District Court instructed the jury that to be found guilty, the defendant’s
“intent to gain such influence must, at least in part, have been the reason the remuneration was offered or
paid.” The defendant argued on appeal that in order to be convicted the jury should have been required to
find that the motivation to induce referrals was the primary purpose behind the offer or payment of
remuneration. The Tenth Circuit rejected this argument, based on Davis’, Kats’, and especially Greber’s
formulation of the one purpose test. Although the McClatchey court held that a party’s hope or
expectation that a lawful business relationship with a doctor will lead to referrals does not violate the
AKS, it further held that the party must enter into that business relationship “for legal reasons entirely
distinct from its collateral hope for referrals.” 52
Pg. 15
B. Challenging the “Knowing” Elements of Civil and Criminal False Claims
The earlier discussion regarding the ambiguity defense and the instinctual tendency to involve evidence of
intent in the objective falsity determination reveals the close link between falsity and scienter.53 Just as
ambiguity in the underlying rule or regulation makes it difficult to demonstrate that a defendant made a
literally false statement or claim, it also makes it difficult for the prosecution to prove that the defendant
possessed the requisite intent to submit a false claim.
A defendant may be found guilty of violating various criminal false claims statutes only if prosecutors can
prove that he knew, at the time that he tendered the claim or statement, that it was false.54 Similarly, in
order to recover for civil false claims, the government generally must prove that the defendant knew that
it was not entitled to payment when submitting the claim. While the circuits differ as to what precise
mens rea each of the fraud statutes actually require, they generally agree that at a minimum, the defendant
must have possessed “knowledge of falsity.”55 Innocent mistakes, or negligence, are not actionable.56
When knowledge, or something greater, is required under the statute the defendant is accused of violating,
the argument that the defendant lacked this state of mind is commonly referred to as the “good faith” or
“mistake” defense. A good faith defense typically proceeds along the lines of the following jury
instruction:
“A person who acts . . . on a belief or opinion honestly held is not punishable…merely because the belief
or opinion turns out to be inaccurate, incorrect, or wrong. An honest mistake in judgment or an honest
error in management does not rise to the level of criminal conduct.”57
Often, the same evidence of ambiguity that a defendant introduces to establish reasonable doubt of literal
falsity supports a good faith defense. The Second Circuit in United States v. Siddiqi recognized that the
ambiguity of the procedural code at issue implicated not only the literal falsity elements of the false
claims and mail fraud counts under §§ 287 and 1341, but also the mens rea requirements:
“Each of the Mecca counts [false claims under § 287 and mail fraud under § 1341] required proof that
Siddiqi used code 96500 with a dishonest intent. Based on the present record, inference of such an intent
cannot be drawn from use of the code. As noted, code 96500 allows billing for ‘supervision,’ a term that
is, on this record, unclear. The government’s principal expert on this issue was unable to provide a
definition of supervision, and the government cannot be allowed to prevail on the claim that it is fraud for
Siddiqi not to have anticipated the definition embodied in [the government’s] theory…”58
Pg. 16
Similarly, in United States v. Freshour the Sixth Circuit overturned one count of the defendant’s mail
fraud convictions on the ground that ambiguity in the Medicaid providers’ manual prevented her from
knowing that the claims she submitted for reimbursement were false. The government claimed that
Freshour fraudulently billed KY jelly as skin gel. The court, however, noted that there was no specific
code in the manual for KY jelly, nor was there a definition for “skin gel” that may have enlightened the
defendant as to the code’s proper use. The interchangeable nature of the products and general confusion
in the industry over the proper billing reference further convinced the court that Freshour lacked sufficient
knowledge of the falsity of her claim to sustain the conviction. 59
It is apparent that, unlike the element of objective falsity, a myriad of considerations apart from the
ambiguity of the rule or regulation enter into the good faith determination. While the trier of fact will be
required to put on blinders to all other evidence apart from that which pertains to the ambiguity of the
underlying rule or regulation in making the objective falsity determination, scienter determinations are
made with respect to all of the facts and circumstances of the case -- of which the ambiguity of the
underlying rule or regulation is just one. Prosecutors may refute the ambiguity defense as it is applied to
the element of objective falsity only by negating all reasonable interpretations of the underlying rule or
regulation that would make the defendant’s statement or claim true. With respect to a defendant’s
assertion that because the rule governing his conduct was ambiguous, he did not know that his statement
or claim was false at the time that he made it, prosecutors have significantly more weapons in their
arsenal.
The government can defuse the good faith defense premised upon ambiguity in a variety of ways. It may
introduce direct or circumstantial evidence indicating that the defendant had actual knowledge of the
proper interpretation of the underlying regulation, code, or rule. In United States v. Duclos, the
defendant’s direct admission that “he knew the nature of his act and he knew [its] likely effect,” was
sufficient to demonstrate intent. 60 In United States v. DeSalvo, the government successfully demonstrated
that the defendant knew that the Medicare claims she filed were false by showing a videotape in which
the defendant boasted of her experience and knowledge of Medicare regulations. 61 Most prosecutions,
however, rely upon circumstantial evidence to demonstrate that the defendant possessed sufficient
knowledge of the false or fraudulent nature of his conduct. Testimony indicating that an employee of an
agency that administers a health care reimbursement program instructed the defendant regarding the
proper claims procedure may be introduced to prove that the defendant had actual knowledge that the
reimbursement claims he filed were false. Such instruction need not be formal, official or written: courts
Pg. 17
have inferred the requisite knowledge on the basis of evidence that oral instructions were given over the
telephone by a low-level employee. 62
The defendant’s conduct, if consistent with knowledge or a suspicion of illegality, may also be used to
demonstrate the requisite intent. In United States v. Hooshmand, the defendant-neurologist instructed his
staff to address consultation reports to doctors who never requested them, place copies in patients’ files,
and then destroy the originals.63 Such conduct illustrates that the defendant knew that his billings for
“consultations” might not be legitimate. In United States v. Weiss, the defendant, a supplier of medical
devices, was convicted of mail fraud for filing Medicare reimbursement claims to carriers in jurisdictions
other than that where the sales were made in order to receive greater reimbursement. Whenever a carrier
eventually realized that the defendant’s claims should have been filed in another jurisdiction, the
defendant would select another jurisdiction, file his claims there until the new carrier realized the error,
and so on. This conduct, combined with an elaborate mailing system designed to ensure that the proper
jurisdiction’s postage mark appeared on each envelope, constituted persuasive evidence that Weiss knew
that he was filing claims illegally. The defendant’s similar prior fraudulent acts may also supply the
requisite intent. 64
Moreover, evidence that the defendant deliberately ignored, or had a reckless disregard for the truth, may
be sufficient to demonstrate the defendant’s lack of good faith and satisfy the knowledge requirement. 65
A “deliberate ignorance,” or “ostrich”66 jury instruction allows the jury to find the defendant guilty if it
concludes that the defendant had actual knowledge or had adopted an attitude of “willful blindness” and
kept himself “deliberately ignorant” regarding the proper rules or regulations or their interpretation.67
Such an instruction is appropriate, however, only when the defendant claims “a lack of guilty knowledge”
and there are facts in evidence that would support an inference “that the defendant may have purposely
avoided learning the facts or shut his eyes to avoid learning the existence of a fact he all but knew.”68
Such an instruction was proper in United States v. Erickson, where the defendant physician stated that he
was “not in any way involved” in billing determinations even after he was interviewed in connection with
an investigation by the Health Care Financing Administration (“HFCA”) into his office’s billing practices
and instructed regarding the proper procedures.69 A deliberate ignorance instruction was also held to be
appropriate in United States v. Lennartz, where the operator of an ambulatory service for Medicaid
patients failed to review the actual mileage, routes, or waiting times of its drivers, or even whether
scheduled trips actually took place, before filing Medicaid reimbursement claims.70
Pg. 18
Although some complain about the congruity of a deliberate indifference instruction with the knowledge
requirement, in FCA cases based on underlying kickbacks and off-label marketing, even deliberate
indifference may no longer be required. While only one court has directly addressed the subject with
respect to kickbacks, many of these actions are pursued in the absence of any evidence regarding the
defendant’s scienter with respect to the alleged underlying violation. In fact, the Middle District of
Tennessee held in Pogue that, even in the absence of any evidence that the defendant had knowledge of
the violation underlying the false claims suit, knowledge may be implied to the extent that the defendant
presumptively hid the violation from the government in order to obtain reimbursement.71 Similarly, the
court in Parke-Davis, citing to Pogue, suggested that the fact that the claims were submitted by another
entity will not relieve the manufacturer whose off-label marketing caused the submission of the claims
from liability – regardless of the mental state of the party submitting the claims and regardless of the lack
of certification of compliance by the pharmaceutical manufacturer.72 Such actions threaten to eviscerate
the scienter requirement of the law allegedly violated.
C. Using Advice of Counsel to Negate Improper Intent
Pharmaceutical manufacturers should consider seeking legal advice of counsel before undertaking any
marketing practice premised on an ambiguous rule. Although it usually requires waiver of the attorneyclient
privilege with respect to all communications on the matter, evidence that the defendant sought, in
good faith, the advice of competent, fully informed counsel before committing the allegedly illegal act is
strong evidence of the defendant’s good faith and the reasonableness of his interpretation,73 and may
disprove willfulness.74
If possible, when seeking the advice of counsel regarding an ambiguous statute or regulation, the
company should request counsel to state his opinion in writing. Oral opinions may lack sufficient indicia
of timeliness, accuracy, and credibility upon which a court may comfortably conclude that the defendant
lacked the willfulness to commit fraud.75
United States v. Lewis provides an example of how the advice of counsel defense can effectively negate
the intent element. In Lewis, the defendants were accused in an FCA qui tam suit brought by a former
employee of misrepresenting themselves to Medicare as a dialysis supplier and taking illegal kickbacks in
the form of self-referrals. The defendants, owners of a dialysis facility and dialysis supply company,
argued that they lacked knowledge of the falsity of their Medicare reimbursement claims because their
attorneys, members of a single law firm, had advised them that they were in compliance with the
applicable laws and regulations. With respect to each of the defendants’ two businesses, the firm advised
Pg. 19
them upon incorporation and on compliance with Medicare regulations. The defendants never specifically
asked if the common ownership of their two businesses might result in regulatory violations, but nor were
they ever alerted to the possibility. Although the defendants did not receive specific advice stating that
their reimbursement claims were in compliance with the FCA, they were implicitly advised that their
common ownership arrangement did not violate any existing statutes or regulations. After assuring itself
that the defendants did not conceal any material facts from their attorneys, and noting the defendants’
consistent efforts to apprise themselves of and comply with relevant statutes and regulations, the court
agreed that the defendants lacked the requisite knowledge of falsity and granted summary judgment in
their favor. 76
Lewis demonstrates that the advice of counsel defense need not be based on specific, affirmative advice.
A provider who routinely receives legal advice, and reasonably delegates compliance issues to its
attorneys, may invoke the advice of counsel defense if it is prosecuted for a violation of which it was
justifiably unaware. It is doubtful, however, that a court would be as likely to accept the advice of counsel
defense had there been evidence of bad faith or deliberate ignorance on the part of the defendants.
V. Challenging Damages
In FCA cases based on violations of the Anti-kickback Statute, the Department of Justice has repeatedly
taken the position at the negotiation stage and in its public appearances that the appropriate measure of
damages subject to trebling is the total amount of the affected claims paid. While DOJ has never actually
litigated, or even briefed, this point, the theory espoused by the government is that these claims are
“tainted” by the underlying statutory violation, that the government would not pay such claims had it
known of the violation, and that the amounts paid are therefore damage. According to DOJ, Congress has
defined the types of services for which it would pay. Services rendered as a result of illegal kickbacks are
simply non-covered—and program participants are not entitled to reimbursement. To the extent that the
government pays such claims, DOJ takes that position that the government is damaged for FCA purposes.
While the government widely espouses this position, no court has yet had an opportunity to rule on the
proper measure of damages in an FCA case alleging false claims based on Anti-kickback Statute
violations. It is, however, well-established that no damages can be awarded under the False Claims Act
where the plaintiffs have failed to make a showing of an actual loss having been sustained by the
government.77 This circumstance has frequently arisen in such “false certification” cases, where the
Pg. 20
government premises its claim on the theory that the claims are false because – had the government
known about the false certifications of compliance – it would not have paid any funds. While a growing
number of courts have recognized false certification as a valid theory sufficient to state a claim under the
FCA, those same courts have rejected the government’s argument that damages in such cases should be
equivalent to all funds received by the defendant. But applying basic FCA damages principles, the
appropriate measure of damages in such cases should be the difference between what the government
actually paid and what it would have paid had there been no statutory violation – that is, what the
government would have paid had the referrals not been tainted by improper financial relationships. Those
few courts that have calculated the amount of loss to the government as a result of government program
referrals tainted by prohibited financial relationships have utilized this method. Each of these courts
concluded that the government suffered no actual loss arising out of the payment of claims for such
services because it got exactly what it paid for. And many other courts – including Thompson and Pogue
– have acknowledged that, because Medicare pays the same amount for each service no matter where
provided, there are no true “overpayments” or “inflated” Medicare payments caused by improper
referrals.78 This is particularly true when there is no evidence of overutilization.79
While no court has yet ruled on the proper way to calculate damages under the FCA for false claims
based on improper referrals, analogous decisions exist in the criminal sentencing context under the AKS,
where courts have looked to the “actual loss” suffered by the government in determining the amount of
restitution owed. These decisions uniformly reject the notion that the government has suffered “loss” in
the amount of all funds paid on claims infected by improper referrals.
In United States v. Anderson, the court found that the government’s only “actual loss” as a result of an
illegal referral arrangement is the Cost Report impact of any illegal or improper payments. In sentencing
the defendants who had been convicted of violating the AKS, the Anderson court determined an
appropriate restitution penalty. Like the FCA, the applicable sentencing guidelines and interpretive case
law require that the restitution order be “based on the amount of loss actually caused by the defendant’s
offense.” As under the FCA, the government has the burden to prove the amount of the loss. Applying
this criteria, the court ultimately concluded that the appropriate restitution damages consisted of the Cost
Report effect of illegal payments to physicians, which the court concluded were the only “amounts the
government would not have had to pay but for the illegal remuneration schemes.”
The government had urged that the Anderson court issue a restitution order in one of four possible
amounts: (1) the amount of the bribe or kickback; (2) the amount Medicare paid the hospitals for inpatient
Pg. 21
services for patients referred by the physicians, under the theory that the provider was unjustly enriched
by the receipt of payments that the government did not intend for it to receive; (3) the amount Medicare
reimbursed the hospitals through the Medicare Cost Reports; or (4) a percentage of the salary of the
convicted hospital administrator.
The Anderson court soundly rejected the government’s argument that the amount of restitution should be
based on the total amount Medicare paid on tainted referrals. It accurately recognized that – at least where
there is no proof of unnecessary treatment – the kickback scheme affected only the location of treatment,
not the amount that Medicare paid in reimbursement for those treatments, and thus that the government
would have paid the same amount in reimbursement for patient care regardless of the kickbacks. It found
that the government’s tainted claims theory had “no merit” because a restitution order is to be based on
actual loss, not on the amount by which the defendant was unjustly enriched. In this regard, the court
noted that, unlike other sentencing guideline applications, a restitution order cannot be based on the actual
or intended gain to the defendant; rather, it must be “based on the amount of loss actually caused by the
defendant’s offense.”
Anderson applied a similar analysis to reject the government’s argument that restitution be based on the
amount of the kickback or bribe. Relying on the fact that the kickbacks affected only where the service
was provided, and not the amount reimbursed, the court found that the amount of the kickbacks had no
relation to the amount of loss suffered by the government. It held that: “It would be inappropriate to value
the amount of loss on the amount of the consulting fees paid by the hospitals and received by the doctors
because the government has failed to show any nexus between the amount of what it considers as the
bribes and the amount of its loss.” The court further reasoned that the payment of kickbacks (other than
those claimed on the Cost Reports) did not cause any loss to the government because those funds were
paid out of hospital – rather than government – funds.
Focusing on actual loss, the Anderson court ultimately concluded that the only losses actually suffered by
the government in a kickback case are the amount of bribes or kickbacks for which the provider sought
and received reimbursement from Medicare on its Cost Reports because “these amounts are the only
amounts the government would not have had to pay but for the illegal remuneration scheme.” 80
Application of this type of approach could drastically limit, or even eliminate FCA damages, depending
on the type of remuneration that is at issue. For example, if the kickbacks are income guarantees, or
practice support or fees paid to Medical Directors, damages should be limited to that portion of such fees,
Pg. 22
if any, that is claimed on the Cost Report and actually reimbursed. In the case of a pharmaceutical
manufacturer that does not file Cost Reports, that amount is likely to be zero. Similarly, if the kickbacks
consist of un-repaid loans, below-market leases, or other remuneration that does not involve a direct
payment to the physician, even a direct provider could argue that the government suffered no loss at all,
since the government did not reimburse the provider for any additional amounts because of the kickbacks.
In United States v. Vaghela, the Eleventh Circuit faced the same restitution issue addressed by the
Anderson court, although it reached a different conclusion. In Vaghela, the district court had calculated
the amount of restitution at approximately $50,000, the amount for which the government was billed
under Medicare for the tainted referrals. The Eleventh Circuit disagreed with this calculation, and found
that the proper amount of loss for purposes of restitution was $23,400 – the amount that the provider
received in illegal kickbacks in exchange for the referrals. The court first pointed to the applicable
sentencing guidelines, which limited restitution to the amount of the government’s loss, and then
confirmed that it is the government’s burden to prove the amount of loss by a preponderance of the
evidence. The court accurately recognized that the amount of loss suffered by the government is not the
amount of revenue paid for the tainted referrals, but then went on to assume that the amount of the
kickback was a reasonable reflection of the government’s loss. The court rejected the government’s
speculation that kickbacks necessarily result in overutilization: “Speculation that Medicare ends up
paying for some medically unnecessary treatments and tests when kickbacks are provided in exchange for
the referral of Medicare patients and services is insufficient to support the government’s burden to prove
actual losses in each particular case.” 81
It is not yet clear that courts will accept either the Anderson or the Vaghela analysis and apply it in the
FCA context. But given that the FCA, like the sentencing guidelines, requires the court to look at the
government’s actual loss, and given the government’s burden under the FCA to prove the amount of
actual loss with specificity, such an approach appears most appropriate, and should be a focus of
settlement discussions in any pharmaceutical fraud investigation based on alleged kickbacks.
VI. Conclusion
Government investigations and whistleblower actions have become a fact of life in the health care
industry. Pharmaceutical manufacturers – due in no small part to their historic profitability – are in the
eye of the storm. With often hundreds of millions of dollars at stake, and the ultimate penalty of exclusion
as an option, most companies choose to settle rather than to roll the dice and litigate. But reaching a
Pg. 23
negotiated resolution – even when in a cooperative mode – does not require unconditional surrender, and
pharmaceutical manufacturers and their counsel can and should consider these and other similar options
when developing defense strategies.
1Katherine A. Lauer is a partner in the San Diego office of Latham & Watkins, LLP. She can be reached at 619-238-
2841, or at katherine.lauer@lw.com.
2 Press Release, Office of Inspector General, “OIG Reports $38 Billion in Savings and Recoveries for FY 2006”
(12/5/06).
3 Testimony of N. Messuri, Assistant Attorney General; Director, Massachusetts Medicaid Fraud Control Unit; and
President, National Association of Medicaid Fraud Control Units, before U.S. Senate Finance Committee (6/28/05).
4Office of the Inspector General, Work Plan for Fiscal Year 2006 (“2006 OIG Work Plan”) at 39.
542 U.S.C. § 1320a-7b(b) and 21 U.S.C. § 331.
6 42 U.S.C. § 1320a-7a(a)(7); 7b.
7See 42 U.S.C. § 1396(a)(10)(a), 1396d(a)(12).
8See 32 C.F.R. § 199.4(d)(1)(vi).
921 U.S.C. §§ 301 et. seq.
1021 U.S.C. § 352.
1121 U.S.C. § 360aaa – 360aaa-6.
12For example, in September 2005, GlaxoSmithKline elected to pay $150,000,000 to the government to resolve
allegations that it had improperly “inflated” its reported prices, However, the government’s price fraud theories have
suffered some notable defeats as well. In 2004, a jury acquitted eight current and former employees of TAP
Pharmaceuticals of conspiring to pay kickbacks to doctors, in part, by marketing the spread between the actual cost
of TAP’s drug Lupron and its AWP-based reimbursable rate. See United States v. MacKenzie, et al., Case No. 1:01-
cr-10350-DPW (D. Mass. 6/13/03). And in a civil trial in December 2005, a West Virginia jury agreed with Warrick
Pharmaceuticals that its practices with respect to reporting its drug’s AWP complied with all applicable state
regulations.
13On the other hand, some pharmaceutical companies are still feeling the dead hand of AWP. For example, in
Schering-Plough’s 10-K filing with the SEC for the period ending September 30, 2005, it noted that it is currently
responding to an investigation by the US Attorney’s Office for the District of Massachusetts into whether the AWPs
set for certain drugs resulted in “unlawful inflation” of certain drug reimbursements.
142006 OIG Work Plan at 10.
15Determining the “best price” at which a drug is sold involves a complicated series of calculations that take into
account some but not all types of price reductions. 42 U.S.C. § 1396-r.
16United States ex rel. Edward Bogart, et al. v. King Pharmaceuticals, Inc., et al., Case No. 03-01538-MK (E.D. Pa
3/12/03).
172006 OIG Work Plan at 26.
Pg. 24
18See “PBMs Fault Independent Pharmacists for Allegedly Fixing Reimbursements,” 3 Pharmaceutical Law &
Industry 22 at 577 (6/3/05).
192006 OIG Work Plan at 39.
20See 31 U.S.C. §3729(7).
21914 F. Supp. 1507 (M.D. Tenn. 1996).
2220 F. Supp. 2d 1017 (S.D. Tex. 1998).
23See United States ex rel. Bidani v. Lewis, 264 F. Supp. 2d 612 (N.D. Ill. 2003); United States ex rel. Barrett v.
Columbia/HCA Health Care Corp., 251 F. Supp. 2d 28 (D.D.C. 2003); Pogue II, 238 F. Supp. 2d at 266, United
States ex rel. McNutt v. Haleyville Medical Supplies, Inc., 2005 WL 2179164 (11th Cir. 9/9/05).
24See U.S. ex rel. Urbanek v. Laboratory Corp. of America Holdings, Inc., No. 00-CV-4863 (E.D. Pa. 8/14/03) and
U.S. ex rel Barmack v. Sutter Corp. and Orthologic Corp., 2002 U.S. Dist. LEXIS 8509 (S.D.N.Y 2002).
252003 WL 22048255 at *4-5 (D. Mass. 8/22/03)
2631 U.S.C. § 3729(a)(1),(2). See. e.g., U.S. ex rel. Swafford v. Borgess Medical Center, 98 F. Supp. 2d 822 (W.D.
Mich. 2000).
27United States v. Whiteside, 2002 U.S. App. LEXIS 4610 (11th Cir. 3/22/02); United States v. Anderson, 579 F.2d
455 (8th Cir. 1978), cert. denied by 439 U.S. 980, 99 S.Ct. 567 (1978); United States v. Race, 632 Fed. 2d, 1114 (4th
Cir. 1980); United States v. Adler, 623 F.2d 12 (8th Cir. 1980).
28United States v. Whiteside, 2002 U.S. App. LEXIS 4610 at *17 (11th Cir. 3/22/02).
29Id. at *17–18.
30Id. at *18-21.
31Id. at *21.
3281 F.3d 1465 (9th Cir. 1996), cert. denied, 519 U.S. 865, 117 S.Ct. 175 (1996).
33Id. at 1477. In U.S. ex rel. Oliver v. Parsons Company, 95 F.3d 457 (9th Cir. 1999), cert. denied, 120 S. Ct. 2657
(2000), a panel of the 9th Circuit limited Hagood’s interpretation of the “falsity” requirement to situations involving
interpretations of statutes that are “discretionary” and stated that where a case turns on the interpretation of
regulations that “while unquestionably technical and complex, are not discretionary [, falsity] is ultimately the
subject of judicial interpretation.” Id. at 463. No other court has adopted Parsons novel analysis. The Parsons court
specifically acknowledged that if a standard is so vague as to be unknowable in advance, liability is impossible. Id.
Regardless of whether the analysis is couched in terms of falsity or scienter: “[t]o take advantage of a disputed legal
question . . . is to be neither deliberately ignorant nor recklessly disregardful.” U.S. ex re.l Hagood v. Sonoma
County Water Agency, 929 F. 2d 1416 (9th Cir. 1991); See also U.S. ex rel. Trim v. McKean 31 F. Supp 2d 1308,
1315 (W.D. Okla. 1998) (“for a statement to be knowingly false, it must be more than merely an innocent mistake or
misinterpretation of a regulatory requirement.”); U.S. Napco International Co., Inc. 835 F. Supp. 493 (D. Minn.
1993).
3498 F. Supp. 2d. 822, 832 (W.D. Mich. 2000). Numerous other decisions follow this line of reasoning. United States
v. Krizek, 859 F. Supp. 5 (D.D.C. 1994), affirmed in part and remanded, 111 Fed. 3d 934 (DC Cir. 1997); Luckey v.
Baxter Healthcare Corporation, 183 Fed 3d 730, 732 (7th Cir. 1999), cert. denied, 120 S.Ct. 562 (1999) (“As
Pg. 25
written, the regulations do not resolve this debate. Baxter had to make a decision for itself.”); United States ex. Rel.
Cox v. Iowa Health System, 29 F. Supp. 2d 1022 (S.D. Iowa 1998).
35United States v. Bay State Ambulance & Hosp. Rental Serv., 874 F.2d 20, 33 (1st Cir. 1989).
36See id.
37H.R. Rep. No. 96-1167, at 59 (1980), as reprinted in 1980 U.S.C.C.A.N. 5526, 5572.
38See Medicare And Medicaid Amendments Of 1980, Pub. L. No. 96-499, 94 Stat. 2625.
39See, e.g., United States v. Greber, 760 F.2d 68, 71 (1985) (summarizing the district court’s jury instructions as
simply requiring that the defendant knowingly and willfully caused a payment to be made with the intent to induce
referrals).
40See Ratzlaf v. United States, 510 U.S. 135, 137 (1994).
41See Hanlester Network v. Shalala, 51 F.3d 1390, 1394-1400 (9th Cir. 1995). The Ninth Circuit also upheld the
ruling that the AKS was violated by various corporate entities that the liable defendant acted as an agent for, under a
theory of vicarious liability, but overturned the rulings against the rest of the individual defendants.
42United States v. Davis, 132 F.3d 1092, 1094 (5th Cir. 1998). Davis’s interpretation of Hanlester is questionable,
given that the Hanlester court stated that a defendant is guilty of “knowingly and willingly” violating the AKS only
if he: “(1) know[s] that § 1128B prohibits offering or paying remuneration to induce referrals and (2) engage[s] in
prohibited conduct with the specific intent to disobey the law.” Hanlester, 51 F.3d at 1400 (§ 1128B refers to the
section of the Social Security Act codified in the United States Code at 42 U.S.C. § 1320a-7b).
43See United States v. Jain, 93 F.3d 436, 440-41 (8th Cir. 1996).
44See United States v. Starks, 157 F.3d 833, 837-39 (11th Cir. 1998).
45See 42 U.S.C. § 1320a-7b(b)(2)(A).
46United States v. McClatchey, 217 F.3d 823, 834 (10th Cir. 2000); see also Hanlester Network v. Shalala, 51 F.3d
1390, 1398 (9th Cir. 1995) (interpreting the phrase “to induce” similarly).
47United States v. Greber, 760 F.2d 68-72 (3d Cir. 1985). A Holter monitor is a devise which continuously measures
a patient’s heart rhythm in order to detect intermittent arrhythmias.
48See United States v. Davis, 132 F.3d 1092, 1094 (5th Cir. 1998) (emphasis added).
49See United States v. Bay State Ambulance & Hosp. Rental Serv., 874 F.2d 20, 29-30 (1st Cir. 1989) (“Giving a
person an opportunity to earn money may well be an inducement to that person to channel potential Medicare
payments towards a particular recipient.”).
50See United States v. Kats, 871 F.2d 105, 106, 108 n.1 (9th Cir. 1989).
51See id. at 108 & n.2 (emphasis added).
52United States v. McClatchey, 217 F.3d 823, 834-35 (10th Cir. 2000). The Tenth Circuit, in a separate appeal
arising out of the same prosecution of different defendants: (1) upheld their holding from McClatchey that the AKS
only requires proof beyond a reasonable doubt that “one purpose,” rather than the “primary purpose,” of offering or
paying remuneration was to induce referrals; (2) stated that the same reasoning mandates that the “one purpose” rule
applies to the “solicitation or receipt” portion of the AKS; and (3) rejected the defendants vagueness challenge to the
Pg. 26
court’s “one purpose” test, as that test was applied to them. See United States v. Lahue, 261 F.3d 993, 1004-07 (10th
Cir. 2001).
53See Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir. 1999).
54See United States v. Milton, 602 F.2d 231, 233 (9th Cir. 1987); United States v. Burke, 1991 U.S. App. LEXIS
10119 at *6-8; United States v. Laughlin, 26 F.3d 1523 (10th Cir. 1994); Robert Fabrikant et al., Health Care Fraud:
Criminal, Civil and Administrative Law § 3.02 (2003)
55See Moses, supra note 3, at 505-06; Fabrikant et al., Health Care Fraud: Criminal, Civil and Administrative Law §
3.02 (2003).
56United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1420 (9th Cir.1991); Wang ex rel.
United States v. FMC Corp., 975 F.2d 1412, 1420 (9th Cir. 1992); United States v. Nachman, 145 F.3d 1069, 1074-
76 (9th Cir. 1998).
57United States v. Munoz, 233 F.3d 1117, 1131 (9th Cir. 2000).
5898 F.3d 1427, 1439 (2d Cir. 1996).
59United States v. Freshour, 1995 WL 496662 at *5 (6th Cir.)(unpublished opinion).
60214 F.3d 27, 33 (1st Cir. 2000).
6141 F.3d 505 (9th Cir. 1994).
62United States v. Lennartz, 948 F.2d 363, 367-68 (7th Cir. 1991); United States v. Larm, 824 F.2d 780, 783 (9th Cir.
1987).
63Hooshmand, 931 F.2d at 732.
64United States v. Weiss, 930 F.2d 185, 189-91, 194 (2d Cir. 1991).
65Moses, supra note 3, at 505-06; Kim, False Statement, 40 Am. Crim. L. Rev. 511, 519 (2003). See also Lennartz,
948 F.2d at 369; Erickson, 75 F.3d at 480; United States v. Nackman, 145 F.3d 1069, 1074-76 (9th Cir. 1998);
United States v. Thomas, 484 F.2d 909 (6th Cir. 1973); United States v. Sarantos, 455 F.2d 877, 881 (2d Cir. 1972);
U.S. v. Evans, 559 F.2d 244, 246 (5th Cir. 1977).
66Lennartz, 948 F.2d at 369.
67Erickson, 75 F.3d at 480 (upholding use of “deliberate ignorance” instruction in § 287 false claims prosecution).
68Id. (citing United States v. Mapelli, 971 F.2d 284, 286 (9th Cir. 1991)); United States v. Nazon, 940 F.2d 255, 259
(7th Cir. 1991).
69Id. at 474, 480.
70Lennartz, 948 F.2d at 369.
71See United States ex rel. Pogue v. American Healthcorp, Inc., 914 F. Supp. 1507, 1513 (M.D. Tenn. 1996).
722003 WL 22048255 at *9-10.
73Matter of Extradition of Kulekowskis, 881 F.Supp. 1126, 1147 (N.D.Ill. 1995).
Pg. 27
74Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 1579 (7th Cir. 1996) (recognizing advice of counsel as a defense to
crimes involving willfulness); United States v. Smith, 2001 WL 371927, at *1 (9th Cir.)(unpublished)(same). But see
U.S. v. United Medical and Surgical Supply Corp., 989 F.2d 1390, 1403 (4th Cir. 1993) (“Good faith reliance on the
advice of counsel is not a complete defense to an allegation of willful misconduct, but is merely one factor a jury
may consider when determining [defendant’s] state of mind.”).
75See, e.g., Eli Lilly and Co. v. Zenith Goldline Pharmaceuticals, 2001 WL 1397304, at *19 (S.D. Ind.
2001)(unreported opinion).
76United States v. Lewis, 2001 WL 32868 at *1, 7, 9-10 (N.D. Ill. 2001)(unreported).
77See, e.g., Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1375 (Fed. Cir. 1998) (awarding False
Claims Act penalty but no damages where no evidence of actual loss); Ab-Tech Construction, Inc. v. United States,
31 Fed. Cl. 429, 434 (1994) (finding Government not entitled to damages absent showing that goods received were
worth less than amount paid), aff’d, 57 F.3d 1084 (Fed. Cir. 1995); United States v. Advance Tool Co., 902 F. Supp.
1011, 1017 (W.D. Mo. 1995) (refusing to award False Claims Act damages where Government failed to present
evidence of value of goods received).
78See, e.g., United States ex rel. Pogue v. American Healthcorp., 914 F. Supp. 1507, 1513 (M.D. Tenn. 1996)
(acknowledging that Anti-kickback and self-referral violations resulted in no loss to the Government because
amount paid does not vary depending on where service provided or why specific provider chosen); United States ex
rel. Thompson v. Columbia/HCA Healthcare Corp., 20 F. Supp. 20 1017, 1046 (S.D. Tex. 1998) (implicitly
acknowledging that the allegations forming the basis for the action did not result in the Government paying more for
the services than it would have paid absent the violations); United States v. Jain, 93 F.3d 436 (8th Cir. 1996)
(recognizing that, despite violation of Anti-kickback Statute, evidence at trial showed that patients were hospitalized
appropriately, there was no substandard or unnecessary care and there was no indication that the Government paid
more that it would have in the absence of the kickbacks); United States v. Anderson, 85 F. Supp. 2d 1084, 1102 (D.
Kan. 1999) (finding that kickback scheme affected only the location of treatment, not the amount that Medicare paid
in reimbursement for those treatments, and thus that the Government would have paid the same amount in
reimbursement for patient care regardless of the kickbacks).
79See, e.g., Vaghela, 169 F.3d at 736.
8085 F. Supp. 2d at 1101-02 (citing United States v. Messner, 107 F. 3d 1448, 1455 (10th Cir. 1997) and United
States v. Guthrie, 64 F.3d 1510, 1516 (10th Cir. 1995)).
81169 F.3d 729, 736 (11th Cir. 1999).
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