Our firm is ever mindful of the importance of the attorney client privilege and has had success curbing aggressive government tactics that invade the privilege.  Harbor Healthcare Systems LP v. United States, 5th Circuit Court of Appeals Case No. 19-20624, provides additional fodder in protecting our clients from such infringement.

In Harbor, the 5th Circuit Court of Appeals held that the government cannot disregard attorney-client and work-product privileges when they raid corporate offices, even when protected by search warrants obtained before the raids and the use of a ‘taint team’ of attorneys to review the seized documents and emails before use in legal proceedings. The ruling sets clear precedent that the government must respect corporations’ right to confidential attorney communications.

At issue in the appeal was whether the government had the right to refuse the return of privileged documents seized from raids of Harbor’s properties. The 5th Circuit affirmed that Harbor met the governing circuit test for the return of its property by showing both the government’s “callous disregard” for Harbor’s rights as well as the ongoing harm as a result of the government’s failure to respect its attorney-client and work-product privileges.

The government asserted that they showed sufficient regard for Harbor’s rights because they obtained search warrants to raid Harbor’s offices and utilized a team of independent lawyers to review the seized documents for privileged material. Further, the government challenged Harbor’s need to physically possess the seized privileged materials since they are merely copies of originals in Harbor’s possession. Last, the government claimed that Harbor’s demand for the return of documents was an attempt to prevent the government’s use of the materials in the matter, asserting that the appellate court should wait for potential criminal charges before deciding on a course of action regarding the privileged information.

The 5th Circuit dismissed the government’s arguments, claiming Harbor has a right to confer with its lawyers in confidence. “Harbor remains injured as long as the government retains its privileged documents,” the appeals court said. “That injury can only be made whole by the government returning and destroying its copies of the privileged material.”

Further, the appeals court stated that the government failed to obtain specific authorization to seize privileged materials. The government was aware that its search of Harbor’s premises and the chief compliance officer’s computer would return communications with Harbor’s attorneys.

The government even conceded in a stipulation that it did not notify the magistrates who signed its 2017 search warrants that privileged material would likely be seized. The government made “no attempt to respect Harbor’s right to attorney-client privilege,” the 5th Circuit wrote.

The government’s improper acts continued, as rather than destroying documents that the taint team deemed to be protected by privilege, the government chose to keep them. As a result, the 5th Circuit stated, “A taint team serves no practical effect if the government refuses to destroy or return the copies of documents that the taint team has identified as privileged.” Hence, the government “conceded that it has no intent to respect Harbor’s interest in the privacy of its privileged materials as the investigation unfolds.”

Harbor asked the 5th Circuit to adopt a skeptical view of taint teams. However, the appeals court merely ruled that the government’s taint team process failed to protect Harbor’s privacy interests. The decision sets clear precedent that the government must respect corporations’ right to confidential and privileged attorney communications.

The Law Offices of Steven Goldsobel regularly represents providers in healthcare post-payment review audits where auditors identified an overpayment.  Recently, an administrative law judge (ALJ) nullified a Medicare auditor’s statistical sampling method because it failed to include underpayments, and in an unrelated appeal the chief statistician for a Medicare administrative contractor (MAC) reached a similar finding. If their method of calculation gains traction, total overpayment amounts may be reduced in some circumstances.

In the first case, the ALJ sided with the appellant durable medical equipment (DME) supplier and held that the Medicare auditor breached the Medicare Program Integrity Manual by neglecting to include unpaid and underpaid service lines. The decision makes clear that when Medicare auditors are calculating audit samples, they should include both underpayments and outstanding claims. Failing to do so might “significantly skew” the audit from the outset.

The ALJ decision involved claims that were denied by a zone program integrity contractor (ZPIC) after a post payment review. The ZPIC utilized a process known as stratified random sampling, where paid amounts act as a proxy to stratify overpayment amounts, which are unknown before sampling. While the DME statistician provided many arguments for why the ZPIC’s sampling methodology was flawed, the appellant’s attorney stated the unpaid claims argument was the clear winner.

According to the ALJ opinion, the DME statistician argued that Chapter 8 of the Medicare Program Integrity Manual “cannot be interpreted to allow the removal of the unpaid or zero-paid service lines from the universe. As a result, the net overpayment was not considered, only the gross overpayment. Sampling size must include all underpayments and zero paid claims and all must be extrapolated to determine the net overpayment. AdvanceMed [the ZPIC] included claim numbers that had multiple individual codes and dates of service, then they removed the individual codes and dates that were not paid. When they remove zero paid line items, the claims are never audited and there is never the opportunity to review for mistakes and potential payment. By removing the zero paid claims they remove the possibility of finding an underpayment. Medicare requires that these zero paid items must be included and reviewed. Not a valid sample due to the lack of the zero paid claims. Sample not properly designed.” The ALJ agreed with the DME statistician and concluded that the statistical sample for the claims at issue is considered invalid.

The ALJ decision comes in light of a similar opinion from the chief statistician at CGS Administrators, a wholly separate MAC. In its appeal, the DME supplier’s statistical expert objected to HHS Officer of Inspector General’s (OIG) audit methodology. The MAC chief statistician agreed with some of the chief statistician’s arguments.

CGS Administrators contended that when a beneficiary is the sampling unit, as was the case here, “all lines for all claims for each beneficiary containing any of the codes of interest should be in the universe, including whole claims paid $0. These $0 paid claims, if they exist, are in the cluster of claims that make up a beneficiary sampling unit and cannot be omitted. The $0 paid claim would be reviewed for potential underpayment just as $0 paid lines must be reviewed when the sampling unit is a claim. Claims paid $0 dollar may not exist in this case, but I cannot determine that because the OIG filtered out claims paid $0 when creating the universe.”

The chief statistician supported her argument by stating that Chapter 8 of the Medicare Program Integrity Manual (Sec. 8.4.3.2) provides that “the sampling frame includes all sampling units which were paid” and “when sample units are clusters, there may be lines or claims included which did not individually generate payment.”

Bruce Truitt, a former faculty member at the Medicaid Integrity Institute stated, “In a nutshell, all overpayments are improper payments, but not all improper payments are overpayments. Some are underpayments.” He noted, “If you don’t include underpayments, you never get to the correct value of the claim. As a result, the true dollar value, and conceivably the claim count of the universe, is not properly determined.”

Truitt stated that initially, auditors “always maintain the single, unique and complete dollar value of the claim. If I have a claim with three line-items on it, one of which is an unpaid zero-dollar value item, one of which is a negative dollar adjustment and the other is a positive dollar amount, leaving out the negative dollar adjustment will affect the total dollar value of the claim. And, if I sample at the line-item level, leaving out the zero-dollar unpaid item will affect the total size of the sampling frame from which I pull the sample.”

The takeaway here is that providers should scrutinize the validity of auditor sampling and extrapolation methods early on.

Modified CIA Claim Review

Some government audits, such as audits conducted under the Improper Payments Elimination and Recovery Improvement Act, may include underpayments. Recently, however, many CMS and OIG auditors have stopped incorporating underpayments in random samples. For example, audits conducted in connection with OIG corporate integrity agreements (CIAs) no longer take underpayments into account.

The chief of OIG’s Administrative and Civil Remedies Branch stated that they altered their CIA “claims review approach from one that required a Discovery Sample and, if the error rate from that Discovery Sample was 5% or greater, a Full Sample, and that approach allowed for ‘netting’ of underpayments. In the current claims review approach, there is just a single sample of paid claims (usually 100) and the error rate is calculated based only on the overpayments as a percentage of the total amount paid.”

Further, OIG often reports audit findings as net overpayments, which is the result of overpayments minus underpayments. “For those audits that involve situations where, through medical review, it is determined that a provider could have been reimbursed more than it was for a particular service, OAS does take into consideration underpayments and nets those against any overpayments.”

Truitt believes Medicare auditors bias the game in their favor and do not give providers credit for some underpayments or claims. He believes this might be the case because the government’s purpose is to protect the Medicare Trust Fund as opposed to health care organizations.

The Law Offices of Steven Goldsobel regularly represents laboratories and companies specializing in marketing for healthcare providers. While national testing for COVID-19 exposure appears to be the key to reopening the economy, and estimates indicate that U.S labs have performed and processed almost 4 million tests for COVID-19, testing poses its own array of potential compliance concerns and risks, especially since private labs have performed 85% of COVID-19 testing. Accordingly, laboratories providing COVID-19 testing should ensure that their marketing and compensation arrangements comply with the federal Anti-Kickback Statute (AKS) and the Eliminating Kickbacks in Recovery Act (EKRA).

The U.S. Department of Justice (DOJ) remains vigilant in rooting out fraud and abuse associated with the pandemic, and has instructed U.S. Attorneys’ offices across the country to “prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.” Indeed, the DOJ already has filed an indictment against Erik Santos, the head of a Georgia healthcare marketing company, with steering Medicare patients to testing facilities for COVID-19 in exchange for kickbacks.

While DOJ has long used the AKS to prosecute healthcare fraud violations, it also may use EKRA as a sword to combat COVID-19-related fraud. Under EKRA, which was signed into law in 2018, it is a crime to solicit or receive payment in exchange for referring a patient to a laboratory, to pay or offer any payment to induce someone to make such a referral or to pay or offer any payment in exchange for an individual using a lab.  EKRA also has broader applications than the AKS because EKRA is not limited to services reimbursed by Medicare or other federal healthcare reimbursement mechanisms. In other words, EKRA applies to COVID testing billed to commercial insurers as well as to Medicare, while the AKS only applies to services paid for by federal programs.  Therefore, a lab may be in violation of EKRA while simultaneously complying with the AKS. Therefore, labs must become familiar with the scope and applicability of EKRA to ensure compliance.

Although EKRA provides statutory exceptions, those exceptions do not necessarily follow the AKS safe harbors regarding compensation for marketing. For instance, EKRA does not allow a volume or value-based compensation structure to employees. Thus, common compensation models, such as paying sales employees commission-based compensation, are deemed to be improper kickbacks under EKRA, even though such compensation may be, in certain circumstances, permitted under the AKS.

The expected increases in COVID lab testing may elevate EKRA as a future enforcement tool. As a result, labs must closely evaluate their current compensation models for marketing practices, including any practices related to COVID testing, to avoid any potentially noncompliant methods.

Imagine you are a partner in a medical radiology group that has an exclusive contract with a hospital that provides radiological diagnostic services to the hospital’s patients, and that revenues derived from this exclusive contractual relationship comprise a large percentage of your annual income.  Now, imagine that a large third-party radiology company seeks to build out a specialized oncological radiology department at this hospital through a joint venture, and as part of its negotiations, demands that the hospital terminate its exclusive contract with your radiology group.  Since a state-of-the-art oncological radiology department will increase the hospital’s revenues exponentially, the hospital agrees, enters into the joint venture with the third-party radiology company, and terminates its contract with your medical group consistent with the termination provisions set forth in your contract, causing substantial financial damage to you and your partners.  To obtain compensation for your financial loss, you intend to file a lawsuit against the third-party radiology company for intentional interference with your exclusive contract.  However, a pending case before the California Supreme Court may determine whether such interference is permissible under California law.

California Business and Professions Code, Section 16600 states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  Pursuant to this statute, California courts have struck down a number of restrictive covenants in contracts with employees in California, including non-compete provisions, customer non-solicit provisions, and certain employee non-solicit provisions.  The Ninth Circuit now wants to know whether the statute should apply outside of the employment context to an agreement between two businesses.

The Ninth Circuit has certified questions to the California Supreme Court in Ixchel Pharma v. Biogen seeking guidance as to: 1) whether section 16600 of the California Business and Professions Code extends to contracts between businesses; and 2) whether pleading an independent wrongful act is required to state a claim for intentional interference with a contract outside the at-will employment context. The California Supreme Court accepted the Ninth Circuit’s inquiry and the Supreme Court will likely rule in the summer or fall of 2020. The California Supreme Court’s ruling could have major implications for business litigation going forward.

Ixchel Pharma and Forward Pharma are both biotech ventures engaged in the business of developing pharmaceutical drugs. Ixchel and Forward entered into a collaboration agreement in January 2016 to develop a new drug to treat a neurological disease.

Forward and Biogen, another biotech company, began negotiating an intellectual property dispute in 2016 after Forward and Ixchel entered into their collaboration agreement. The intellectual property dispute had no relationship to the new drug being pursued under the collaboration agreement between Ixchel and Forward, but Biogen discovered during its negotiations with Forward that the new drug being developed between Ixchel and Forward would be competing with a new drug under development by Biogen.  Accordingly, the settlement negotiations between Forward and Biogen resulted in a settlement agreement in January 2017, wherein Forward agreed to stop working with Ixchel to develop their experimental drug pursuant to a non-compete provision in the Forward/Biogen settlement agreement. Forward then terminated its collaboration agreement with Ixchel and ceased all work on the new drug.

Ixchel subsequently sued Biogen for: (1) tortious interference with a contract; (2) intentional and/or negligent interference with prospective economic advantage; and (3) violations of California’s unfair competition law which prohibits “any unlawful, unfair or fraudulent business act or practice,” Cal. Bus. & Prof. Code § 17200.  Ixchel alleged that Forward gave Biogen a copy of their collaboration agreement without Ixchel’s consent, that Biogen deemed Ixchel’s development work on the new drug a threat to Biogen’s own drug, and that Biogen asked Forward to cut off ties with Ixchel as settlement in their intellectual property dispute.

The district court dismissed Ixchel’s complaint for failing to state a claim for intentional interference with prospective economic advantage and tortious interference with a contract, reasoning that Ixchel failed to plead that Forward engaged in an independent wrongful act. The district court concluded that the collaboration agreement was an at-will contract, requiring Ixchel to plead a wrongful act. The UCL claim also failed because the complaint failed to allege an actionable unlawful business practice.

Ixchel subsequently amended its complaint to allege a violation of section 16600 of the California Business and Professions Code based on Biogen’s settlement agreement with Forward, which wrongfully restrained Forward from engaging in lawful business with Ixchel.  The district court dismissed the amended complaint on the basis that section 16600 barred non-compete agreements between employer and employee and did not apply to agreements outside of the employment context such as the Forward-Biogen agreement.

Neither the Ninth Circuit nor the California Supreme Court has addressed whether section 16600 extends beyond the employment setting to contractual restraints between businesses. The terms of section 16600 state it applies to contracts restraining “anyone” from engaging in lawful business of any kind.  However, the term “anyone” is not defined.

Under California law, a claim for intentional interference with contractual relations in the context of an at-will employment contract requires the claimant to prove an independently wrongful act.  Reeves v. Hanlon (2004) 33 Cal. 4th 1140. However, the California Supreme Court has not addressed whether Reeves applies outside the at-will employment context.

A broadened interpretation would expand section 16600 to bar contracts restraining a business from engaging in lawful business, potentially invalidating contracts like the Forward-Biogen agreement. The expansion may extend to all contracts, including those dealing with joint ventures, leases, distribution agreements, license agreements, and other widely used business agreements that might fall under the purview of a newly broadened section 16600.

Expanding the independent wrong requirement to at-will contracts beyond the employment context would require aggrieved plaintiffs to plead an independently wrongful act to prove an intentional interference with contract claim.

Winter ex rel. United States v. Gardens Regional Hosp. & Me. Ctr., Inc., __ F.3d __, 2020 WL 1329661 (9th Cir. Mar. 23, 2020)

As reported by the California Society of Health Care Attorneys, Jane Winter was responsible for reviewing patient medical records at Gardens Regional Hospital and Medical Center to determine whether admission orders met the Hospital’s medical necessity admission criteria. Shortly after a nursing home acquired ownership in the management company that oversaw operations at the Hospital, Winter alleges she noticed a spike in the number of emergency room patients transported from the nursing home—an overwhelming majority of whom were admitted for inpatient treatment. Believing this to be improper, Winter repeatedly tried to raise her concerns with hospital management, without success. Instead, she was instructed not to question the admissions, and then she was fired.

Winter brought a qui tam action under the False Claims Act alleging that the Hospital and affiliated persons submitted Medicare claims falsely certifying that patients’ inpatient hospitalizations were medically necessary. The district court dismissed Winter’s complaint for failure to plead a plausible claim, ruling that “to prevail on an FCA claim, a plaintiff must show that a defendant knowingly made an objectively false representation” and claims involving a doctor’s clinical judgment can never state a claim under the FCA because “subjective medical opinions . . . cannot be proven to be objectively false.” Winter appealed.

The Ninth Circuit reversed, explaining that “a plaintiff need not allege falsity beyond the requirements adopted by Congress” in the FCA, and Congress did not impose a requirement of proving “objective falsity.” The FCA imposes liability for all “false or fraudulent claims” and does not distinguish between “objective” and “subjective” falsity, nor does it carve out an exception for clinical judgments and opinions. The Ninth Circuit further held that “a false certification of medical necessity can give rise to FCA liability” and can be “material because medical necessity is a statutory prerequisite to Medicare reimbursement.” A doctor’s certification that inpatient hospitalization was “medically necessary” can be false or fraudulent for the same reasons any opinion can be false or fraudulent. Thus, a medical necessity certification is actionable under the FCA if the opinion is not honestly held, or if it implies the existence of facts—namely, that inpatient hospitalization is needed to diagnose or treat a medical condition, in accordance with accepted standards of medical practice—that do not exist.