Qui Tam Suit Can’t Survive on Mere Allegations

Qui Tam Relator Must Allege & Prove Fraud to Government Program

Qui Tam suits do what the government may not – the ferret out fraud against the government or government programs. They exist because the person making the claim of fraud – called the Relator – gets to share in the judgment. This fact, and the multiple millions some Relators collect, tempt others to begin a Qui Tam action in hopes of getting rich even if the evidence does not exist.

In Hagerty ex rel. United States v. Cyberonics, Inc., United States Court of Appeals, First Circuit, — F.3d —-, 2016 WL 7321224 (12/16/16) the First Circuit deal with a Qui Tam case brought by Relator Andrew Hagerty (“Hagerty”) against Cyberonics, Inc. (“Cyberonics”) alleging, among other things, that Cyberonics violated the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., and related state statutes. Specifically, Hagerty alleged that Cyberonics promoted medically unnecessary replacements of batteries in nerve stimulator devices used to treat epilepsy patients, which in turn resulted in patients and medical providers filing false claims for reimbursement from government health care programs.

FACTS & BACKGROUND

The Vagus Nerve Stimulator (VNS) is a medical device that is implanted in patients with refractory epilepsy, a severe form of the disease in which a patient’s seizures seriously interfere with their quality of life and do not respond to other medications or treatment. The VNS works by delivering short electrical pulses to the vagus nerve through a wire. Each VNS system contains a battery, and the entire VNS system must be surgically replaced when the battery nears the end of its life.

Patients with refractory epilepsy often qualify for coverage under government healthcare programs like Medicare and Medicaid. Some treatments for refractory epilepsy, including placement of the VNS, are reimbursed by those programs.

On February 4, 2013, Hagerty filed a qui tam complaint under seal against Cyberonics, alleging that it engaged in a fraudulent scheme to encourage doctors and patients to prematurely and unnecessarily replace batteries in VNS systems. Hagerty, having gained knowledge of the scheme firsthand as a former sales representative of Cyberonics, further alleged that this scheme caused significant monetary damages to government healthcare programs by inducing patients and medical providers to file false claims for reimbursement. On October 29, 2013, the government filed a notice declining to intervene in the case, and on December 5, 2013 the complaint was unsealed and served on Cyberonics.

The First Amended Complaint further alleged that approximately 50% of Cyberonics’ revenue came from Medicare and Medicaid, with additional revenues coming from TRICARE, the Department of Defense, the Department of Veterans Affairs, and the Federal Employee Health Benefits Program.

The district court granted Cybertronics Motion for summary judgment finding that Hagerty had not pled his allegations with the requisite particularity required by federal rules.

ANALYSIS

The FCA penalizes those who present, or cause to be presented, “false or fraudulent claim[s] for payment or approval” to the federal government. Thus, fraud under the FCA has two components: the defendant must submit or cause the submission of a claim for payment to the government, and the claim for payment must itself be false or fraudulent.  Because FCA liability attaches only to false claims, merely alleging facts related to a defendant’s alleged misconduct is not enough. Rather, a complaint based on the FCA must sufficiently establish that false claims were submitted for government payment as a result of the defendant’s alleged misconduct.

A relator can meet the standard by providing factual or statistical evidence to strengthen the inference of fraud beyond possibility without necessarily providing details as to each false claim.  Such evidence generally includes, inter alia, the  specific medical providers who allegedly submitted false claims, the rough time periods, locations, and amounts of the claims, and the specific government programs to which the claims were made.

As the district court noted, the allegations concerning Cyberonics’ scheme are unquestionably adequate to survive a motion to dismiss. Nonetheless, the First Amended Complaint’s factual and statistical evidence struggles to connect these allegations with the submission of any false claims to government programs.

The allegations in Hagerty’s First Amended Complaint are neither specific nor systematic. Despite referencing a long list of healthcare providers who performed and billed for VNS replacement surgeries, the complaint does not allege whether these providers submitted reimbursement claims to the government for unreasonable and medically unnecessary procedures. Likewise, the complaint does not allege how many false claims these providers purportedly submitted or how Cyberonics’ actions caused their submission.

The complaint’s most specific allegation comes where Hagerty states that three healthcare providers, Southbury Training School, Monson Development Center, and Wrentham Development Center, had patients who were “seriously disabled” and eligible for various government healthcare programs, and that the VNS replacement surgeries conducted on those patients necessarily resulted in the submission of at least some false reimbursement claims. Hagerty does not allege that any particular patient was actually covered by a government program, provides no basis for his estimate of 10,000 unnecessary procedures, and does not link Cyberonics’ revenues to these procedures. Viewed individually or as a whole, Hagerty’s “evidence and arguments proceed more by insinuation than any factual or statistical evidence that would strengthen the inference of fraud beyond possibility.”

Plaintiffs may not, having the needed information, deliberately wait in the wings with another amendment to a complaint should the court hold the first amended complaint was insufficient. Such an approach would impose unnecessary costs and inefficiencies on both the courts and party opponents. Thus, the First Circuit concluded both that Hagerty did not meet his burden of providing a valid reason for his delay and that the district court did not abuse its discretion in denying his motion for leave to amend.

ZALMA OPINION

Fraud against governmental entities is a terrible and expensive thing. The government needs the help of the public to fight fraud and the qui tam laws have had a serious effect to reduce fraud against the government. However, to file a successful qui tam action there must be facts to establish that a fraud has occurred. Hagerty failed to do so and his action was properly dismissed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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