The Sixth Circuit recently made some interesting findings related to the knowledge standard in the False Claims Act (“FCA”) and whether maximizing profits is evidence of fraud.

The knowledge standard in the FCA may create a disincentive for defendants to litigate cases brought by the government, especially considering the standard for liability can be met by the government demonstrating that the defendant acted with reckless disregard or in deliberate ignorance of the truth or falsity of the claim.   See 31 U.S.C. § 3729.  In light of this fairly low standard, it is no secret that some defendants decide it is less costly to settle a case, rather than engaging in protracted litigation with the government.  However, in one recent case the defendant, Renal Care Group, Inc. and its wholly-owned subsidiary, decided to fight back against allegations it defrauded the government of millions of dollars while providing dialysis treatments to Medicare beneficiaries suffering from end-stage renal disease.  Renal Care lost the first battle when the district court granted summary judgment in favor of the United States and awarded the government $82.6 million in damages and penalties.  On appeal, however, Renal Care secured a major victory when the court of appeals reversed the district court’s judgments on grounds that Renal Care did not act in reckless disregard under the FCA.

Without going into the specific facts alleged by the government, there are two important findings from this Sixth Circuit decision worth noting.  First, the Sixth Circuit determined that Renal Care did not act recklessly.  Per the Sixth Circuit, a defendant can be held liable under the FCA by showing that it acted with actual knowledge or constructive knowledge.  United States v. Renal Care Group, et al., No. 11-5779, slip op. at 17 (6th Cir. Oct. 5, 2012).  Constructive knowledge can be proven by demonstrating that the defendant acted in deliberate ignorance of, or with reckless disregard to, the truth or falsity.  One of the facts relied on by the court in reaching its decision on the knowledge requirement is that Renal Care sought legal counsel, who in turn sought clarification from CMS on what appears to be fairly ambiguous regulations.  The court focused on this fact, in addition to some others, in reaching its conclusion that Renal Care did not act recklessly. 

The court went on to make an interesting statement about the complexity of federal regulations.  According to the Sixth Circuit, “The False Claims Act is not a vehicle to police technical compliance with complex federal regulations.”  Id. at 19.  There is simply no doubt that many of today’s healthcare rules and regulations can be extremely complicated.  When the rules and regulations are ambiguous and not entirely clear, healthcare providers and suppliers should not be threatened with potential FCA liability or penalized for trying to receive higher Medicare reimbursements.

Second, the appellate court rejected the government’s argument that Renal Care’s desire to maximize profits is evidence of the alleged wrongdoing.  In response to the government’s apparently obsessive focus on evidence suggesting that Renal Care was trying to maximize its reimbursements, the court specifically stated the following: “Why a business ought to be punished solely for seeking to maximize profits escapes us.”  Id. at 14.  The clear take-away from this is that the government’s case must be based on much more than the defendant’s desire to make money.

Our Insight.  Your advantage.  When faced with an allegation of potential liability under the FCA, you will need to convince the government that your organization did not act with the requisite knowledge, which includes the reckless standard.  In order to do this, your organization and legal counsel will need to mount an aggressive defense that may include highlighting the ambiguity or ambiguities in the law.  Hopefully this can be accomplished before you spend valuable time and money to litigate, which is something Husch Blackwell strives for in every matter it defends on behalf of its clients.  While the knowledge standard under the FCA is low, defeating this standard is not insurmountable.  Many times the best option is to push back against the government’s legal theories, some of which are untested in a court of law.  The Renal Care case is proof positive that it sometimes takes an independent and objective arbiter like a court or jury to decide the outcome fairly.