September 09, 2021


Paul B. Murphy, Amy Boring, and William S. McClintock, King & Spalding LLP


This week’s top False Claims Act (FCA) developments include: another FCA settlement involving Medicare Part C; entry of consent judgments over $15 million to resolve FCA and Controlled Substances Act (CSA) allegations; continued FCA enforcement against alleged CARES Act related fraud; and a Delaware court opinion requiring an insurer to advance costs for a FCA civil investigative demand (CID) defense.

1. Sutter Health False Claims Settlement Reflects DOJ’s Continued Focus on Medicare Part C Enforcement

Overview: On August 30, the Department of Justice announced that health care services provider Sutter Health and several affiliated entities had agreed to pay $90 million to resolve allegations brought by a qui tam whistleblower that Sutter violated the FCA by submitting inaccurate diagnosis information about beneficiaries enrolled in Medicare Advantage plans.

Sutter Health contracted to provide health care services to certain Medicare Advantage beneficiaries in California and in return received a portion of the payments for the beneficiaries’ treatment. DOJ alleged that Sutter knowingly submitted unsupported diagnosis codes for certain Medicare Advantage beneficiaries and that the company failed to take sufficient corrective action when it became aware of unsupported codes.

As part of the settlement, Sutter Health and two affiliates entered into a five-year Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General. That Agreement includes implementing a centralized risk assessment program and hiring an Independent Review Organization to annually review a sample of Medicare Advantage patients’ medical records and diagnosis data.

Medicare Part C and Medicare Advantage Plans: As explained in prior posts (here and here), Medicare Part C enables beneficiaries to enroll in Medicare Advantage plans that are administered by private insurers. The plans then receive “capitated,” or per-person, payments for enrolled beneficiaries. To receive those payments, companies submit diagnosis data to CMS that is used to calculate the payments. CMS’s Medicare Part C “Overpayment Rule” states that if an insurer submits a diagnosis code for payment that it later determines cannot be supported by the patient’s medical record, then the payment received from that submission is an overpayment that the insurer is obligated to report and return to CMS within 60 days. Failing to return an overpayment can potentially lead to FCA liability.

Our Take:This settlement reinforces DOJ’s recent identification of Medicare Part C as an “important priority” for health care fraud enforcement. This, along with a recent D.C. Circuit decision reinstating the vacated Medicare Part C Overpayment Rule as discussed in an earlier post and the Government’s intervention in six FCA cases involving Medicare Part C also discussed in an earlier post, indicates that enforcement in this space will continue to be a DOJ priority. Health care providers and private insurers with Medicare Advantage plans should ensure that they have robust compliance programs and measures focused on ensuring accurate diagnosis codes, correcting inaccurate diagnosis codes, and keeping up with overpayment-refund obligations.

2. Bankrupt Mental Health Clinic Operator Agrees to $15 Million Consent Judgments to Resolve False Claims Act and Controlled Substances Act Claims

Overview: On August 26, the United States Attorney’s Office for the District of Delaware announced that Connections Community Support Programs (“CCSP”) had agreed to enter two consent agreements and pay more than $15.3 million to resolve claims under the FCA and the Controlled Substances Act. CCSP operated a number of mental health and addiction treatment clinics throughout Delaware prior to filing for bankruptcy in April 2021.

CCSP agreed to the entry of a $13.75 million judgment to resolve claims that it violated the FCA by billing for mental health services that were provided by individuals ineligible to bill for Medicare or Medicaid reimbursement and by using the wrong procedure codes for the person providing the service. CCSP also agreed to a second judgment of approximately $1.6 million to resolve claims that it violated the CSA by failing to keep proper records regarding its use and transfer of controlled substances like methadone and buprenorphine, intended for treatment of substance use disorders.

The FCA settlement partially resolves a lawsuit brought by two qui tam relators who previously worked as CCSP employees. The relators continue to pursue claims against CCSP and its former CEO. The Government continues to pursue its claims for violations of the CSA against CCSP’s former CEO and two other corporate executives. The settlement must be approved by the U.S. Bankruptcy Court for the District of Delaware.

Our Take: The CCSP settlements serve as an apt reminder of the importance of maintaining a culture of compliance, especially in the health care and pharmaceutical arena. Failure to do so can lead to liability under multiple statutory and regulatory frameworks, with significant and potentially entity-threatening financial consequences.

3. Continued FCA Enforcement Against Alleged CARES Act-Related Fraud

Overview: On August 26, the DOJ announced that Seth Bernstein, the owner of Florida-based jet charter company JetReady, agreed to pay more than $287,000 to settle allegations he misappropriated funds received as part of the Small Business Administration’s Paycheck Protection Program (PPP).

Congress created the PPP in March 2020, as part of the CARES Act, in an attempt to provide financial support to Americans and small businesses in the wake of the COVID-19 pandemic. Under the PPP, certain businesses could obtain loans from the Small Business Administration. Recipients were obligated to spend the proceeds on employee compensation and other specific business expenses and could ultimately qualify for loan forgiveness.

According to the settlement, the United States alleges that Bernstein applied for and received a $1.17 million PPP loan for Jetready, but diverted nearly $99,000 of the loan proceeds to pay for personal, non-company expenses. The claims against Bernstein were brought by a former JetReady employee who filed a qui tam whistleblower suit. The DOJ’s announcement of the settlement noted that the relator would receive $57,000 of the recovery.

Our Take:In May 2021, Attorney General Merrick Garland announced the creation of the COVID-19 Fraud Enforcement Task Force to enhance COVID-19 related fraud enforcement efforts and advance DOJ’s interagency partnerships with the Departments of Labor, Treasury, and Homeland Security; the Small Business Administration; the Special Inspector General for Pandemic Relief (SIGPR); the Pandemic Response Accountability Committee (PRAC); and others.

The Bernstein settlement serves as just one more example of the government’s continued focus on alleged pandemic-related fraud, and the DOJ’s willingness to use the FCA to pursue enforcement action and recover allegedly misappropriated pandemic funds.

4. Delaware Court Requires Insurer to Advance Cost for False Claims Act Civil Investigative Demand Defense

Overview: On August 18, the Superior Court of Delaware held that a liability insurer was required to advance approximately $18 million of defense costs to a mortgage broker responding to a FCA civil investigative demand.

In June 2019, mortgage broker Guaranteed Rate, Inc. (“GRI”) received an FCA CID from DOJ and the U.S. Attorney’s Office for the Northern District of New York regarding allegations that GRI originated and underwrote federally-insured mortgage loans that failed to meet applicable quality control requirements. Eleven days later, GRI notified its liability insurer, ACE American Insurance Company (“ACE”), about the CID. In January 2020, ACE denied that the CID constituted a “Claim” under the policy and declined to advance defense costs.

Both parties moved for judgment on the pleadings in the Superior Court of Delaware. As an initial matter, the Court held that the FCA CID constituted a “claim,” defined in the policy as “a civil, administrative, or regulatory investigation against the Insured.” Second, the Court rejected ACE’s argument that GRI should have requested advancement prior to the disposition of the investigation, rather than simply providing notice of the CID and seeking payment later. Instead, the Court held that the duty to advance was properly triggered by the July 2019 notice and not by the later request for advancement.

Lastly, the Court rejected ACE’s argument that it was not obligated to advance costs as a result of a “professional services exclusion.” The Court noted that the policy did not define “professional services,” and thus held that the exclusion must be construed narrowly in favor of coverage. As a result, the Court held that GRI was entitled to its CID defense costs under the policy.

Our Take: The decision may be significant in disputes between insurers and policyholders regarding coverage for government investigation costs.

Paul B. Murphy is a partner in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office. Amy B. Boring is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office, and William S. McClintock is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s Washington, D.C. office.