August 26, 2021


Craig Carpenito, Yelena Kotlarsky, and Alex Blumberg, King & Spalding LLP


This week’s top False Claims Act (FCA) developments include: a major decision out of the D.C. Circuit upholding the Medicare Part C Overpayment Rule, with important implications for potential FCA exposure for private insurers; a Seventh Circuit decision raising the bar on the FCA’s scienter requirement; and a heated exchange between DOJ and counsel for FCA defendants over DOJ’s criticism of defense discovery tactics, previously discussed here.

1. D.C. Circuit Reinstates Vacated Medicare Part C Overpayment Rule

Overview:On August 13, 2021, the D.C. Circuit upheld the Medicare Part C “Overpayment Rule,” confirming that Medicare Advantage insurers face a legal obligation to correct, report, and return any overpayment to the Centers for Medicare and Medicaid Services (CMS) within 60 days of identifying the overpayment.

Medicare Part C: As explained in an earlier post, under Medicare Part C, beneficiaries can enroll in private insurers’ plans, which are called Medicare Advantage Plans. To receive payments from CMS, these companies submit diagnosis data to CMS that is used in calculating the per-beneficiary payment that Medicare Advantage organizations receive. Under CMS’s “Overpayment Rule,” if an insurer submits a diagnosis for payment that it later identifies cannot be supported by a medical record, then that submission is considered an overpayment that must be reported and returned to CMS within 60 days.

The Decision: The D.C. Circuit reversed the vacatur of the rule, rejecting an insurer’s argument that the rule should be invalidated because the Medicare statute requires “actuarial equivalence” between Medicare Advantage plans and traditional Medicare plans. The insurer argued that this requirement was undermined by the Overpayment Rule, which affected when Medicare Advantage plans could keep certain funds but was not considered by CMS in determining the per-beneficiary funding that Medicare Advantage plans received.

The D.C. Circuit held that there was no basis in the statutory text for applying the actuarial equivalence requirement of the rate-setting regime to the Overpayment Rule, which implemented an Affordable Care Act provision requiring insurers to report and return overpayments received from the federal government that insurers discover on their own.

Our Take: As failing to return an overpayment can potentially lead to FCA liability, the D.C. Circuit’s decision ensures that enforcement activity in the Medicare Part C space is unlikely to abate. That reality is consistent with DOJ’s recent identification of Medicare Part C as an area of focus for health care fraud enforcement. The impact is significant, as private insurers’ Medicare Advantage programs cover approximately one-third of all Medicare beneficiaries. Following the D.C. Circuit’s decision, private insurers with Medicare Advantage programs will want to ensure that they have robust compliance measures in place aimed at keeping up with the overpayment-refund obligation that this rule imposes.

2. Seventh Circuit Extends Safeco’s Scienter Requirement to FCA

Overview: A divided Seventh Circuit panel recently held that the Supreme Court’s interpretation of the scienter requirement of the Fair Credit Reporting Act, as set forth in Safeco Insurance Co. of America v. Burr(2007), applies equally to the FCA. As a result, the court’s decision clarifies the bar that FCA plaintiffs must clear on demonstrating scienter, holding that a defendant does not act with the requisite scienter if it complied with a reasonable interpretation of the applicable regulations.

The Decision:In United States ex rel. Schutte v. SuperValu Inc., et al., relators claimed that SuperValu’s pharmacies had knowingly filed false reports of its “usual and customary” drug prices when seeking reimbursement from Medicare and Medicaid. SuperValu had reported its retail cash prices instead of the lower, price-matched amounts that it charged qualifying customers under its discount program.

The district court found that falsity was established under those facts, but thatSuperValu lacked the requisite scienter. Specifically, the court determined that whether a defendant knowingly or recklessly violated the FCA must be based on objective criteria. An objectively reasonable interpretation of an ambiguous regulation cannot give rise to liability as long as it did not conflict with any authoritative guidance on the issue.

A divided Seventh Circuit affirmed, holding broadly that Safeco’s standard applies to the FCA’s scienter requirement across the various statutory scienter definitions in its text. The Seventh Circuit joined four other circuits—the Third, Eighth, Ninth, and D.C. Circuits—in reaching this conclusion.

Our Take:This decision is a welcome one for FCA defendants, who must routinely interpret and navigate complex regulations. The Seventh Circuit’s decision helps ensure that objectively reasonable interpretations of these complicated regulations do not result in the specter of costly litigation and crippling FCA damages.

3. Tensions with DOJ Continue Regarding Discovery Allegedly Aimed at Extracting (c)(2)(A) Dismissals

Overview:As we previously covered, the Department of Justice filed a brief in the Eastern District of New York strongly criticizing FCA defendants for deploying what the government believes is a tactic to leverage burdensome discovery to prompt the government to dismiss declinedqui tam cases.

In a hearing earlier this month, the tensions in that case escalated. Government counsel complained that FDA resources had been strained in a way that resulted in the agency “serving at the will of [a] private law firm.” In response, an attorney for the defendant stated he was “really angry” at DOJ’s accusation, stating that it was “sanctionable” and “should be stricken from the record.”

Our Take:These tensions highlight government lawyers’ frustrations with discovery demands that they believe are aimed at compelling dismissals. Despite such frustrations, and as we noted in our prior post on this topic, these demands are relevant to raising FCA defenses, and such requests have been recognized by DOJ as a reason to dismiss a declined qui tam case under the proper facts and circumstances.

Also in the News

Telemedicine Company Owner Charged in Superseding Indictment for $784 Million Health Care Fraud, Illegal Kickback, and Tax Evasion Scheme. On August 10, 2021, DOJ announced that a federal grand jury returned a superseding indictment charging a Florida owner of several telemedicine companies with a scheme involving $784 million in false claims to Medicare. According to the indictment, the owner solicited illegal kickbacks and bribes from durable medical equipment (“DME”) suppliers and marketers in exchange for orders for DME braces and medications. The telemedicine companies then allegedly paid physicians to write medically unnecessary orders for the DME. The charges illustrate DOJ’s continued focus on the Anti-Kickback Statute and telehealth issues in health care fraud enforcement, which has major implications for FCA enforcement.

Craig Carpenito is a partner in the Special Matters and Government Investigations Practice Group in the firm’s New York office. Yelena Kotlarsky is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s New York office, and Alex Blumberg is an Associate in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office.