October 23, 2014

Wall Street Journal Article Highlights Increased Scrutiny on In-Office Ancillary Services But Incorrectly Calls This a Loophole

Over the years, there have been attempts to limit the "in-office ancillary services" exception to the physician self-referral law (the "Stark Law"). We have addressed a number of these attempts on our blog (see, for example, Imaging Self-Referrals Could Raise Costs, Hurt Patients, GAO Report Says and Congressional Bill Introduced to Close the In-Office Ancillary Services Exception under the Stark Law). By way of brief background, the Stark Law prohibits a physician from referring Medicare (or other government health plan) patients for certain healthcare services in which the physician has a financial interest. However, in general, the "in-office ancillary services exception" exempts services that are: (1) furnished by a referring physician or member of the same group practice; (2) furnished in a building where the referring physician or group practice furnishes other non-designated health services or in a building used by the group practice for the provision of clinical laboratory services or centralized provision of the group's designated health services; and (3) billed by the physician performing or supervising the services, by the group practice, or by an entity wholly owned by the physician or group practice.

The topic of whether the government should limit this exception to the Stark Law has reached the mainstream media in an article published yesterday in the Wall Street Journal. However, the article contains a number of inaccuracies about the "in-office ancillary services" exception. The article addresses an ongoing investigation by the Office of Inspector General ("OIG") of certain services rendered by a national chain of oncology practices. Although the OIG investigation relates to the medically necessity of services rendered - not a Stark Law violation - a considerable portion of the article criticizes the use of the "in-office ancillary services" exception. It is also important to note that the matter is an investigation only with no proven wrongdoing.

Specifically, the article mischaracterizes the exception as a "loophole" used to exploit the Stark Law. To the contrary, the exception is a lawful, statutory mechanism with hundreds of pages of regulatory commentary supporting, debating, and limiting its use. It is designed to enhance the efficiency of patient care, and it allows for integrated care delivery within a practice. It is not limited to "simple, routine procedures," which the article incorrectly states was the intention behind the exception. Rather, it may be used for more complex procedures and tests as long as all of the requirements of the exception are met. In fact, the author of the article admits that the government has not challenged the interpretation that the exception applies to more complex procedures and tests.

In summary, the article does not offer any new or groundbreaking information on the Stark Law or the "in-office ancillary services" exception. The use of the exception is appropriate when all of its requirements are met. However, the article highlights: (i) the increased scrutiny being placed on the medical necessity of high-value services with a high rate of utilization; and (ii) the increased media and regulatory scrutiny of, and attacks on, the "in-office ancillary services" exception. Therefore, even if the referral is compliant with the Stark Law or one of its exceptions, providers should take care to increase documentation practices to assist in supporting medical necessity of services rendered. In those instances where providers are relying upon the "in-office ancillary services" exception, it is appropriate to confer with healthcare legal counsel to ensure that, in practice, the group meets the "group practice" definition, complies with the "in-office ancillary services" exception, and is otherwise compliant with the Stark Law.

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October 23, 2014

The Sunshine Act: Providers Should Correct Disputed 2013 Open Payments Data By October 31st

On September 30, 2014, the Centers for Medicare & Medicaid Services released the first round of "open payments" data pursuant to the Sunshine Act. Currently, the Open Payments Program lists data on consulting fees, research grants, travel reimbursements, and other gifts the healthcare industry provided to physicians and teaching hospitals during the last five months of 2013. The intention behind the program is to provide consumers with greater transparency of the financial relationships between physicians and healthcare manufacturers and companies.

Providers may submit corrections to disputed data at any time. However, for the corrections to be reflected in the next publication to occur on or before December 31, 2014, providers must submit corrections by close of business on Friday, October 31, 2014. Step-by-step instructions for the data correction process can be found on the Quick Reference Guide: Industry Record Review and Dispute Instructions.

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October 23, 2014

Cardiologists Settle False Claims Act Allegations Stemming From Sham Management Agreements with a Hospital

On October 21, 2014, the U.S. Department of Justice ("DOJ") announced that two Kentucky-based cardiologists agreed to pay $380,000 to resolve qui tam allegations of purported Stark Law and Anti-Kickback Statute violations (thereby resulting in a False Claims Act violation). The cardiologists purportedly entered into sham management agreements with a hospital in exchange for the referral of cardiology and other healthcare services to the hospital. Pursuant to the management agreements, the physicians were paid to provide management services that were, apparently, never performed by the physicians. This particular settlement was based on the physicians' ability to pay. Additionally, the physicians agreed to enter into integrity agreements with the Department of Health and Human Services, Office of Inspector General, which will "obligate them to undertake substantial internal compliance reforms and to commit to a third-party review of their claims to federal health care programs for the next three years."

The purpose of the Stark Law and Anti-Kickback Statute is to safeguard against improper financial incentives that compromise a physician's medical judgment and encourage unnecessary referrals, which in turn increase healthcare costs for federal healthcare programs. This recent settlement highlights that the DOJ is no longer simply focusing just on hospitals and larger entities, but is also now enforcing against physician practices. In fact, on August 14, 2014, the DOJ announced that a New York-based cardiology practice agreed to pay $1,336,636.98, plus interest, to settle allegations that the practice violated the Stark Law, and thereby also violated the False Claims Act. (A summary of this settlement may be viewed here.) Additionally, just a month earlier, the DOJ announced that an Alabama-based health system and a physician practice agreed to pay $24.5 million to resolve False Claims Act allegations stemming from purported violations of the Stark Law and Anti-Kickback Statute. (The DOJ press release may be viewed here.)

These three settlements demonstrate that the federal government is using the full breadth of its power to target entities of all types and sizes - not just hospitals - for Stark Law and Anti-Kickback Statute violations. Physicians and non-hospital providers should take a proactive approach to compliance with these laws. This is a good time for providers to review their practices' compensation guidelines and financial relationships with hospitals and other providers. In particular, providers who have management contracts with hospitals should ensure that the management services are actually rendered and that there is a bonafide need for those services.

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October 7, 2014

New Compounding Pharmacy Law In Michigan

On June 28, 2014, Governor Snyder signed a new comprehensive law imposing significant regulations on compounding pharmacies and pharmacists that compound both sterile and non-sterile pharmaceuticals including criminal sanctions for certain violations. This new law took September 26, 2014 (i.e., 90 days from the date it was signed into law). The law was in response to growing concerns on the safety of sterile compounding after the New England Compounding Center (NECC) fiasco arose in the Fall of 2012 wherein an outbreak of rare fungal meningitis was reported throughout the United States and the etiology was traced by the Centers for Disease Control and Prevention (CDC)to contaminated epidural steroid injections packaged and marketed by NECC, a compounding facility in Massachusetts. Of the 20 states adversely affected, Michigan had the highest number of fungal infections (264) and the highest number of related fatalities (19) according to the CDC (see http://www.cdc.gov/hai/outbreaks/meningitis-map-large.html).

The new law amends Part 161 (General Provisions) and Part 177 (Pharmacy Practice and Drug Control) of the Public Health Code and includes, but is not limited to the following changes:

(1) a person providing compounding services in Michigan is required to be licensed as a pharmacy or manufacturer, and an outsourcing facility is required to be licensed as a pharmacy;
(2) an applicant for a pharmacy license for a pharmacy that would provide compounding services for sterile pharmaceuticals is required to submit verification of current accreditation through a national accrediting organization (e.g., PCAB);
(3) an application process and standards for a pharmacist or pharmacy compounding pharmaceuticals are to be created for a prescriber, health facility, or agency without a prescription;
(4) a pharmacist is prohibited from compounding commercially available pharmaceuticals unless the commercially available pharmaceutical was modified to produce a significant difference and was not available in normal distribution channels to meet the patient's needs in a timely manner;
(5) a pharmacy is required to notify the Department of Licensing and Regulatory Affairs (LARA) of a complaint regarding compounding activities filed by another state for violation of that state's pharmacy laws, an investigation by Federal authorities regarding a violation of Federal law, or an investigation by any agency into a violation of accreditation standards, within 30 days of knowledge of the investigation or complaint;
(6) an out-of-State applicant or licensee is required to reimburse LARA for expenses incurred in an inspection or investigation of the applicant or licensee;
(7) LARA is required to maintain, post, and update on a quarterly basis, a list of pharmacies and pharmacists authorized to compound pharmaceuticals for a prescriber, health facility, or agency;
(8) LARA has the authority to promulgate rules regarding conditions and facilities for compounding pharmaceuticals;
(9) a pharmacist is required to maintain records of compound sterile pharmaceuticals;
(10) a pharmacy, manufacturer, or wholesale distributor is required to designate a licensed pharmacist as the pharmacist in charge (PIC), and establish the duties
of a PIC;
(11) certain applicants for new pharmacies, manufacturers, or wholesale distributors are required to undergo a criminal history check;
(12) there are criminal penalties imposed for violations of certain statutory provisions and requirements; and
(13) LARA may summarily suspend a pharmacy license if it receives a notice of imminent risk to public health or safety from the FDA or the CDC.


The new law in its entirety is available at: http://www.legislature.mi.gov/documents/2013-2014/publicact/pdf/2014-PA-0280.pdf.

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October 6, 2014

Pharmacy Technicians Must Be Licensed In Michigan

On September 23, 2014, Governor Snyder signed a new law requiring pharmacy technicians to be licensed in the State of Michigan. This new law is take effect on December 22, 2014 (i.e., 90 days from the date it was signed into law). Pharmacy technicians will be required to submit an application for licensure, have graduated high school or passed the GED and submit proof of passing a certified pharmacy technician examination. There is a provision within the law that allows an employer to provide training in lieu of such examination but such training program must be pre-approved by the Board of Pharmacy. Furthermore, the examination requirement is not required if the individual is a student in a pharmacy technician program approved by the Board of Pharmacy or is applying for a temporary license [which is available for students preparing to take the examination but is only good for 210 days from the date the temporary license is issued] or limited license [which is available for an individual who (i)was employed as a pharmacy technician on the effective date of the new law and has been continuously employed by the pharmacy since the effective date, (ii) submits a completed licensure application and pays the applicable fee, and (iii) provides satisfactory proof of employment as a pharmacy technician for at least 1,000 during the 2-year preceding the application] as set forth in the new law. Once licensed, a pharmacy technician will be required to complete at least 20 hours of Board-approved continuing education courses/programs every 2 years. The new law in its entirety is available at: http://www.legislature.mi.gov/documents/2013-2014/publicact/pdf/2014-PA-0285.pdf.

It should be noted that under the new law, pharmacy technicians cannot handle the transfer of controlled substance prescriptions and cannot receive verbal orders for controlled substance prescriptions. For pharmacies and pharmacists who have been plagued by theft by pharmacy technicians this new law will make it much more difficult for such technicians to seek employment elsewhere if the theft is reported to the Board of Pharmacy since they will now be held accountable and would likely lose their licenses thereby preventing them from working elsewhere.

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October 3, 2014

The OIG Proposes Revisions to the Safe Harbors Under the Anti-Kickback Statute, and to the Civil Monetary Penalties Rules on Beneficiary Inducements and Gainsharing.

On October 3, 2014, the Office of Inspector General published a proposed rule to amend the safe harbors under the Anti-Kickback Statute, as well as to revise the definition of "remuneration" under the Civil Monetary Penalties regulations and add a gainsharing CMP provision into the regulations. If adopted, the final rule would have a major impact on the Anti-Kickback Statute and Civil Monetary Penalties regulations. The proposed rule, 79 FR 59717, may be found here.

Please check back for a complete summary of the proposed rule...coming soon to the HLP Blog.

Continue reading "The OIG Proposes Revisions to the Safe Harbors Under the Anti-Kickback Statute, and to the Civil Monetary Penalties Rules on Beneficiary Inducements and Gainsharing." »

September 19, 2014

DOJ to Scrutinize False Claims Act Investigations and Lawsuits for Criminal Conduct

The Department of Justice's ("DOJ") Criminal Division announced, through its Assistant Attorney General, Leslie R. Caldwell, that the DOJ is closely scrutinizing civil False Claims Act investigations and lawsuits for criminal conduct. Speaking at the Taxpayers Against Fraud Education Fund's annual conference in Washington D.C., Ms. Caldwell asked attorneys contemplating filing qui tam lawsuits to reach out to criminal authorities, just as they would reach out to the civil counterparts in the DOJ and U.S. Attorney's Offices. Ms. Caldwell emphasized that there are resources available to the DOJ's Criminal Division that aren't available to other agencies, such as search warrants, wiretaps, consensual recordings, undercover operations, confidential informants, and legal assistance requests to foreign governments for evidence in other countries.

The DOJ's practice of combing through civil False Claims Act cases in the healthcare arena is not new. However, through this announcement, the DOJ clearly intends to expedite and streamline its internal referral process and the examination of cases for criminal conduct. Ms. Caldwell explained that "experienced prosecutors in the Fraud Section are immediately reviewing the qui tam cases" upon arrival to determine whether to pursue criminal charges.

In summary, those facing civil exposure under the False Claims Act should be aware that the DOJ may be using a fine-tooth comb to sift through the qui tam complaint for criminal conduct. If the DOJ finds criminal conduct, the negotiations will likely shift from avoiding or reducing fines to avoiding criminal charges. Therefore, the DOJ may use the threat of criminal charges as leverage to negotiate larger fines.

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September 19, 2014

ICD-10 Compliance Date Officially Set for October 1, 2015

As expected, the U.S. Department of Health and Human Services ("HHS") officially set the ICD-10 compliance date for October 1, 2015. Previously, providers and payors had until October 1, 2014 to transition from the ICD-9 to the ICD-10 Procedure Coding System. However, the Protecting Access to Medicare Act of 2014 prevents HHS from adopting ICD-10 before October 1, 2015, and a final rule (here) published by HHS on August 4, 2014, set the official compliance date.

The one-year delay allows providers and payors additional time to prepare for the implementation of the costly ICD-10 coding system. The American Medical Association ("AMA") reported, for example, that a small physician practice can expect to spend anywhere from $56,639 to $226,105 to prepare for ICD-10 implementation. While the AMA continues to urge regulators to ease this burden on providers, the compliance date has been set, and providers and payors must use this year to properly prepare for the transition in the hopes of minimizing cash-flow interruptions that could hinder the provision of patient care.

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September 11, 2014

DEA ELEVATES HYDROCODONE-COMBINATION PRODUCTS TO THE MORE RESTRICTIVE CATEGORY OF SCHEDULE II DRUGS

In an attempt to combat prescription drug abuse, on August 22, 2014, the U.S. Drug Enforcement Administration ("DEA") published a final rule (here) elevating Hydrocodone-combination products ("HCPs") to the more restrictive schedule II category of drugs under the Controlled Substances Act ("CSA"). Since the enactment of the CSA in 1971, HCPs have been classified as schedule III drugs. Under the final rule, effective October 6, 2014, DEA registrants are required to adhere to more stringent prescribing, dispensing, security, and recordkeeping requirements with respect to HCPs. The final rule applies to "all pharmaceuticals containing hydrocodone currently on the market in the United States," which includes, but is not limited to, Vicodin, Lortab, Hycodan, and Tussionex.

How Will The New Rule Affect Prescribers?

Under the final rule, prescribers may no longer authorize refills for HCP prescriptions. Previously, authorized prescribers could prescribe a 30-day supply of HCPs with up to five refills. Under the final rule, practitioners may issue multiple prescriptions authorizing patients to receive up to a 90-day supply of HCPs, provided certain regulatory requirements are met. However, the DEA will allow pharmacists to refill legitimate HCP prescriptions until April 8, 2015, if the prescription allows refills and was issued prior to October 6, 2014. Additionally, like other schedule II controlled substances, prescribers will no longer be able to "call in" or "fax in" HCP prescriptions to a pharmacy absent an emergency.

Moreover, prescribers must prepare for a potential increase in the need for physician office visits for patients using HCPs and should expect greater regulatory scrutiny concerning the prescribing of HCPs. In fact, the DEA cautioned that prescribers must determine whether multiple prescriptions (i.e., up to the allowed 90-day supply of HCPs) are appropriate for a particular patient, and they must base their decision "on sound medical judgment and in accordance with established medical standards."

How Will The New Rule Affect Manufacturers, Distributors, and Pharmacies?

Under the final rule, manufacturers, distributors, and pharmacies must meet heightened security and recordkeeping standards. More specifically, manufacturers that repackage or re-label HCPs must obtain a quota in order to repackage or re-label HCPs. However, the DEA will allow repackaging and re-labeling without meeting the quota requirement until December 8, 2014.

For distributors, the primary change is that they must physically store HCPs in a vault that meets certain requirements. For pharmacies, the final rule requires them to use a DEA Form 222 in order to obtain HCPs from a distributor. Pharmacies will also be required to keep HCP records separate or readily retrievable. In addition, pharmacies should move quickly to update ordering systems with new National Drug Code numbers.

Conclusion.

The DEA published the final rule merely 45 days prior to the effective date, and health care entities and professionals must move quickly to implement the more stringent schedule II requirements. Furthermore, it is important to remember that each state has its own rules regarding controlled substance prescribing that must be followed as well. Prescribers and dispensers of controlled substances are well advised to follow the more restrictive/conservative requirements when there is a conflict between federal and state law. E.g., under the subject final rule, any legitimate prescription for HCPs that are issued before October 6, 2014 that authorizes refills may be dispensed by a pharmacy if such dispensing occurs before April 8, 2015; however, under Michigan's Administrative Rules, a prescription for a controlled substance listed in schedule II shall not be refilled. Thus, in Michigan, as of October 6, 2014, prescribers should not write prescriptions with refills for HCPs and dispensers should not dispense HCPs pursuant to a prescription refill. Additionally, health care entities and professionals should review any state specific legal or regulatory requirements that emerge as a result of this final rule. For example, the Ohio Board of Pharmacy issued a companion publication (here) addressing Ohio-specific compliance issues related to the final rule. While the rescheduling is not without opposition, the change is here and the October 6, 2014, effective date is right around the corner.

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September 9, 2014

Modifications to the Electronic Health Record Meaningful Use Incentive Program

On September 4, 2014, the Department of Health & Human Services, Centers for Medicare & Medicaid Services ("CMS"), published a final rule (See, 79 FR 52910) modifying the Medicare and Medicaid Electronic Health Record Meaningful Use Incentive Program ("EHR Meaningful Use Incentive Program"). The reason for the modification is that health care providers were unable to upgrade to the 2014 certified electronic health record technology ("CEHRT") due to product delays and availability. The final rule allows more flexibility in how providers use CEHRT to meet meaningful use for an EHR Meaningful Use Incentive Program for the 2014 reporting period. CMS reports that this flexibility will allow more providers "to participate and meet important meaningful use objectives like drug interaction and drug allergy checks, providing clinical summaries to patients, electronic prescribing, reporting on key public health data, and reporting on quality measures."

The final rule states that CMS will allow providers to use 2011 CEHRT to meet Stage 1 objectives or a combination of 2011 and 2014 CEHRT to meet Stage 1 or Stage 2 objectives. However, providers still using 2011 CEHRT must attest to the failure to implement 2014 CEHRT due to delays beyond their control. Additionally, all eligible providers will be required to use 2014 CEHRT beginning in 2015. The final rule also finalizes the extension of Stage 2 through 2016 for certain providers, and extends the Stage 3 start date from January 1, 2016, to January 1, 2017, for providers who first became meaningful users in 2011 or 2012.

The final rule is effective October 1, 2014.

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August 29, 2014

BCBSM Places Limits on Quantity of Highly Abused Narcotics

With the fight against prescription drug abuse reaching an all-time high, health insurance plans are now taking a proactive role in attempting to reduce the quantity of some of the most abused drugs in the marketplace. As of September 2, 2014, Blue Cross Blue Shield of Michigan (BCBSM) commercial plans (non-Medicare) will implement new quantity limits for Oxycodone immediate release tablets and capsules (sold under the brand names of Roxicodone an OxyIR) and Oxymorphone immediate release tablets (sold under the brand name of Opana) of 180 per 30 days. These new limits apply to all strengths of the generic and brand-name versions of these drugs. Some pain management physicians have expressed concern that such limitations are an attempt by the health insurance companies to usurp the medical judgment of treating physicians due to cost containment measures while others believe that such limitations are helpful in reducing the potential for unsupervised use, misuse or abuse of prescription painkillers that can lead to addiction, hospitalization and even death. BCBSM will entertain a written request from a prescriber for an override of the limitation that includes documentation that the amount prescribed is medically necessary. A quantity limit override form is available from BCBSM on its website.
The attorneys at The Health Law Partners have a significant amount of experience in the defense of health care fraud investigations and pharmacy legal matters. For more information regarding such matters, please contact Robert S. Iwrey, Esq. at (248) 996-8510 or riwrey@thehlp.com.

August 14, 2014

OIG Posts New Guidance for Submitting a Contractor Self-Disclosure

On August 12, 2014, the Office of Inspector General ("OIG") posted new guidance for contractors self-disclosing violations of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations or violations of the civil False Claims Act in connection with U.S. Department of Health and Human Services contracts or subcontracts. The Federal Acquisition Regulation ("FAR") requires federal contractors with contracts valued over $5 million to disclose to the OIG when they have credible evidence of one of these violations. The FAR contractor self-disclosure rule provides, in part:

(3)(i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed-- (A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733). (See, 48 CFR 52.203-13(b)(3)(i).)

The newly posted guidance instructs that self-disclosure made under the rule "are made with no advance agreement regarding possible OIG resolution of the matter and with no promises regarding potential civil or criminal actions by the U.S. Department of Justice." However, the guidance states that prompt disclosure, along with full cooperation, completed access to necessary records, restitution, and adequate corrective actions indicate an attitude of integrity even when self-disclosing potential criminal conduct.

The Guidance for Submitting a Contractor Self-Disclosure, the Contractor Self-Disclosure Form, and Frequently Asked Questions regarding the self-disclosure program are available on the OIG's website at https://oig.hhs.gov/compliance/self-disclosure-info/contractor.asp.

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July 16, 2014

Halifax Health to Pay $1M Settlement in False Claims Case

One of the most widely viewed False Claims Act (FCA) cases filed against a hospital is coming to an end--Florida hospital, Halifax Health, is preparing to pay $1 million to settle a $73 million dollar Medicare overbilling case. Potentially, maximum damages in the trial could have exceeded $200 million, which would then be followed by an $85 million dollar settlement that the health system paid in March to settle the first half of the case. Although the False Claims Act makes it illegal for hospitals to submit inaccurate bills to Medicare, Judge Presell, who presided over this case, ruled that it doesn't necessarily trigger the FCA to bill Medicare for cases in which the medical record lacks enough information to justify admission for inpatient stays.

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July 16, 2014

D.C. Circuit Restores Attorney-Client Privilege Protection for Internal Investigations

Companies doing business in highly-regulated industries, including the health care industry, were left holding their breath after a D.C. district court ruled that the attorney-client privilege doctrine did not attach to a company's internal investigation conducted under the direction of in-house legal counsel. United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276 (D.D.C. Mar. 6, 2014). The decision shattered the previously-held belief that, in most cases, the attorney-client privilege attaches to communications made in the course of an internal investigation led by legal counsel.

However, these industries, and their legal departments in particular, can now breathe easy after the D.C. Circuit Court overturned the district court's decision and restored the attorney-client privilege to its previously-recognized applicability to internal investigations. In Re: Kellogg Brown & Root, Inc., et al., No. 1:05-cv-1276 (D.C. Circuit, May 7, 2014).

Factual Background and District Court's Ruling

Harry Barko, a former employee of defense contractor Kellogg Brown & Root, Inc. ("KBR"), filed a False Claims Act compliant under the qui tam provision alleging that KBR defrauded the federal government by inflating costs and accepting kickbacks while administering military construction contracts in Iraq. During discovery, Barko requested that KBR produce certain documents related to KBR's previously-conducted internal investigations looking into the alleged fraudulent activity. The investigations were conducted at the direction of KBR's in-house legal counsel, and KBR asserted the attorney-client privilege in refusing to produce the documents.

In a potentially groundbreaking decision, the district court held that the attorney-client privilege did not attach to the requested documents because "the communication would not have been made 'but for' the fact that legal advice was sought." The district court concluded that KBR's internal investigation was conducted for a business, not legal, purpose and "undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice."

In so holding, the district court distinguished the facts in KBR from those in the landmark U.S. Supreme Court case Upjohn Co. v. United States, 449 U.S. 383 (1981), in which the Supreme Court held that the attorney-client privilege applies to corporations. The district court held that Upjohn did not apply because: (i) outside counsel was not involved in KBR's investigation; (ii) non-attorneys conducted many of the interviews; and (iii) KBR did not inform the interviewees that one purpose of the interviews was to assist KBR in obtaining legal advice.

The district court's ruling caught the attention of the health care industry, among others, where internal investigations into fraudulent or illegal activity are common and, in some instances, required by law. Many health care businesses lack the necessary resources to involve outside counsel in every internal investigation or to have an attorney conduct every employee interview, and the district court's ruling threatened the presumed protections of the attorney-client privilege doctrine.

Circuit Court's Ruling

In a much anticipated decision, and to the relief of the health care industry, the circuit court overturned the district court's decision and held that the attorney-client privilege attached to the requested documents.

The circuit court found that the facts of KBR were "materially indistinguishable" from the facts in Upjohn and rejected the reasoning used by the district court to distinguish the two cases. First, the circuit court held that Upjohn does not require the involvement of outside counsel. Rather, the "general rule...is that a lawyer's status as in-house counsel 'does not dilute the privilege.'" Second, the circuit court held that, while the interviews in Upjohn were conducted by attorneys, "communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege." Third, the circuit court held that there is no requirement in Upjohn that a company use "magic words" to advise its employees that the investigation is being conducted to assist the company in obtaining legal advice. Nevertheless, the circuit court found that, as in Upjohn, the KBR interviewees "knew that the company's legal department was conducting an investigation of a sensitive nature and that the information they disclosed would be protected."

More importantly, the circuit court rejected the "but for" test applied by the district court as inapplicable to the attorney-client privilege analysis. The circuit court clarified the "primary purpose test" and held that the proper test asks the question: "Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?" If so, then the attorney-client privilege attaches, regardless of whether the internal investigation was conducted pursuant to company policy, a statute or a regulation.

Implications

The circuit court acknowledged the significance of its decision when it branded the district court's opinion a "novel approach" that "would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industries."

In an ever-changing industry where some health care providers are subject to compliance program requirements for Medicare enrollment under the Patient Protection and Affordable Care Act (or are encouraged to implement voluntary compliance programs), health care businesses should take note of both the circuit court's and the district court's opinions. These opinions are a reminder of the importance of having attorneys actively direct the internal investigation and document their involvement. This includes providing written instructions to non-attorneys working on the investigation clarifying that they are working at the direction of the legal department and that a significant purpose of the investigation is to assist the business in obtaining legal advice.

The circuit court's opinion also reminds us that the attorney-client privilege protects against the disclosure of privileged communications, not the underlying facts if the facts can be obtained through non-privileged sources. Additionally, only confidential communications are protected. Therefore, it is important to ask interviewees to keep communications confidential. Also, although "magic words" are not required for the attorney-client privilege to attach, it is prudent to inform the interviewees that the interview is for the purpose of obtaining legal advice for the business. Once conveyed to the interviewee, the interviewer should memorialize in writing that the instructions were conveyed to and understood by the interviewee.

Lastly, it remains to be seen whether other courts will follow the D.C. Circuit's opinion. Therefore, out of an abundance of caution and if the resources are available, businesses should consider having legal counsel conduct employee interviews and should consider engaging outside counsel, if appropriate.

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July 14, 2014

Office of Medicare Hearings & Appeals Announces Settlement Conference Facilitation Pilot Program

The landscape of the Medicare appeals process is quickly changing with the launch of the Settlement Conference Facilitation ("SCF") pilot program. The program is designed to be an alternate dispute resolution process where the appellant and the Centers for Medicare & Medicaid Services ("CMS") come together to discuss a potential mutually agreeable resolution of claims appealed at the Administrative Law Judge ("ALJ") level.
The settlement conference facilitator, an employee of the Office of Medicare Hearings and Appeals ("OMHA"), will oversee the process. He or she will not make determinations based on the merits of the claims nor will serve as a fact finder. Rather, the facilitator will use mediation principles to achieve the goal of reaching a mutually agreeable resolution. The facilitator may, however, help the appellant and CMS identify the relative strengths and weaknesses of their respective positions.
In the event a resolution is reached, the settlement facilitator will draft a document, signed by both parties, to reflect the agreement. As part of the agreement, the requests for an ALJ hearing for the claims covered in the settlement will be dismissed.

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