On 11 December 2018, the United States Attorney's Office for the District of New Jersey submitted a Statement of Interest to a federal court, asking the court to rule on a specific question of law that implicates the scope of the materiality standard in False Claims Act (FCA) jurisprudence: whether a pharmaceutical company that violates the Anti-Kickback Statute (AKS) and causes a hospital to submit reimbursement claims for non-covered uses of a drug, can be held liable under the FCA if the federal government pays for the drug through a flat, bundled payment.

Bundled Payments & the Pending Suit Against Bayer Corp.

Traditionally, the federal government makes separate payments to Medicare providers for each service they provide to beneficiaries during a single illness or course of treatment. Concerned that this approach could result in fragmented care and minimal coordination amongst health care providers, Congress created a voluntary Medicare pilot program in 2013 that aggregated payments for the multiple services beneficiaries receive in a single episode of care, into flat-rate, bundled payments. This program - referred to as the Bundled Payments for Care Improvement (BCPI) initiative - was designed to encourage high quality, coordinated care while reducing Medicare costs to the federal government.

In a whistleblower action pending in the United States District Court for the District of New Jersey, a former Bayer Corp. (Bayer) employee has accused the company of offering kickbacks to induce doctors to use a surgery drug called Trasylol - a drug that the federal government pays for through bundled payments. According to the whistleblower, Bayer's violative conduct encouraged health care providers to prescribe Trasylol to patients, and to ultimately submit reimbursements claims to the government that were tainted by the kickbacks and not covered under Medicare, thereby rending those claims false under the FCA.

Bayer argues that because the federal government paid for Trasylol through flat, bundled payments, any underlying violations of the AKS or drug coverage requirements could not have increased the amount the government paid, and thus could not have been material to its decision to pay the claim.

What Constitutes "Materiality" Under the FCA?

In the 2016 landmark decision United Health Services v. United States ex rel. Escobar, the Supreme Court unanimously upheld the "implied false certification" theory of FCA liability. This theory generally stands for the proposition that by submitting a claim for payment or reimbursement to the federal government, an entity implicitly certifies that the items and services covered by each claim were provided in compliance with applicable statutory, regulatory, or contractual requirements. In order for this theory to serve as a basis for FCA liability, the Escobar Court held that at least two conditions must be met: (1) the claim must not only request payment, but must make specific representations about the goods or services provided; and (2) the failure to disclose non-compliance with material statutory, regulatory, or contractual requirements makes those representations about the goods or services misleading half-truths.

Whether an entity's misrepresentation about compliance with a statute, regulation, or contractual requirement is material for purposes of FCA liability turns on whether the entity knowingly violated a requirement that it knew would have actually affected the government's decision to pay the claim. The Escobar Court held that proof of materiality can thus include (but is not limited to) evidence that the defendant knew the federal government consistently refuses to pay claims in similar cases based on noncompliance with the particular statutory, regulatory, or contractual requirement at issue. Conversely, the Escobar Court held that evidence that the government pays a particular claim in full despite knowledge that certain requirements were violated is strong evidence that those requirements are not material.

Feds Say Method of Payment & Payment Amount are Irrelevant under Escobar

Citing Escobar and its progeny, the federal government argues in its Statement of Interest that the materiality standard is focused on how a defendant's misrepresentation affects the government's decision to pay, not on the method through which the government pays a claim (e.g., through a bundled payment), or on the amount the government pays.

Focusing its analysis on the government's decision to pay, the government argues in its Statement of Interest that misrepresentations about compliance with the AKS render claims materially false because compliance with the statute goes to the heart of what the federal government pays for when it subsidizes health care: the assurance that care is being provided based on professional medical judgement, rather than on a provider's personal financial interest. Similarly, the government argues that misrepresentations about compliance with drug coverage requirements also render claims materially false because Congress has established that if a provider's use of a medical item or service is not covered by Medicare or some other federal program, a claim for payment for that item is not reimbursable.

Thus, the government argues that compliance with the AKS and drug coverage rules are material to the government's decision to pay, and cannot be rendered immaterial merely because the Government' reimburses certain claims through bundled payments.


The materiality standard as articulated in Escobar is highly fact-intensive, and is thus likely to evolve over time as federal courts are asked to apply the standard under different factual landscapes. But regardless of whether the federal court in the Bayer suit accepts the arguments made by the government in its Statement of Interest, pharmaceutical companies that take advantage of bundled payment programs should be mindful of the methods used to market drugs to health care providers. Off-label uses of a drug should not be promoted, and internal controls should be implemented to ensure that any discounts, grants, or other benefits used to encourage drug sales do not violate the AKS.

In addition to these marketing considerations, and in order to further protect themselves from FCA liability, pharmaceutical companies that participate in bundled payment programs should be generally mindful of actions that would have a tendency to influence, or are capable of influencing, the government's decision to pay a claim.

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