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Health Care Law Alert

US v. Rockwell May Limit Speculative Qui Tam Complaints Alleging Fraud Under the False Claims Act

Wednesday, April 25, 2007

After the Supreme Court’s March 27, 2007, decision in
U.S. v. Rockwell International
, future whistleblowers and their attorneys will
have to screen more carefully potential fraud cases regarding the Medicare
Prescription Drug Benefit program (Part D) and will face a greater risk of not
being paid on speculative claims under the federal False Claims Act (FCA). The
Supreme Court held that a whistleblower who “predicts“ fraud cannot recover in
light of a public disclosure if the whistleblower did not accurately describe
and have knowledge of the cause and effect. This should afford companies time to
which they are entitled to self monitor and correct problems before they turn
into FCA qui tam

Even though
was not a Medicare or health care related
case, it should have an immediate impact on potential pending and future
qui tam
lawsuits under the FCA involving Medicare Part D. Compliance and anti-fraud
initiatives are among the most widely discussed aspects of Part D. The FCA is
the centerpiece, with its up-to 30 percent bounty for whistleblowers. Given the
notoriety of recent hundred-million-dollar FCA health care cases, whistleblowers
already may have filed speculative
qui tam
complaints trying to anticipate what fraud may exist. Before
a whistleblower was likely to recover a share of any settlement, regardless of
what the government found. After
however, whistleblowers will have to come forward with more accurate and
detailed information to share in any recovery. Those who do not will face
stronger opposition.

The Rockwell Decision

Rockwell International Corp. (RIC) contracted with the
Department of Energy to dispose of nuclear waste. Whistleblower Stone worked for
RIC as an engineer and predicted that Rockwell’s plan to dispose of nuclear
waste would fail for certain technical reasons. Three years after he was laid
off by RIC, Stone filed his
qui tam
complaint under the FCA upon learning that
there was a leak with the nuclear waste system. The government intervened, the
case went to trial, and the jury returned a verdict against RIC. The government
argued at trial that RIC’s nuclear waste disposal system failed for reasons
unrelated to what Stone had predicted and asserted in his
qui tam

RIC filed a post verdict motion to disqualify Stone as a
whistleblower, arguing that the claims were based on publicly disclosed
allegations, and that Stone was not an original source under the FCA. An
individual can qualify for a whistleblower share of the recovery under the FCA,
even if there is a predated public disclosure, if that individual is an original
source. Stone acknowledged that his claims were based on publicly disclosed
allegations, but claimed he was an original source.

The Supreme Court held that Stone was not an original source
under the FCA. The Court concluded that if a whistleblower predicts the wrong
cause and effect in light of a public disclosure, as did Stone, then he or she
could not be an original source. The Court did not reach the question of whether
or not a whistleblower who predicts fraud would automatically be barred under
all circumstances. Given the tenor of this decision, however, the bar certainly
is set very high.

In reaching its decision, the Court noted that the whistleblower
must be the original source of the allegations in the original complaint and all
amendments thereto. This should mean that if the theory of the case shifts
during the course of the government’s investigation, which is very common, then
the whistleblower could loose his status under the FCA and may not share in the
recovery. Rockwell
will significantly alter the dynamics between the whistleblower and government,
and the whistleblower’s cost/benefit analysis for determining when to bring and
pursue a case.

Potential Implications of Rockwell for Alleged Fraud
Under Part D

The implications of
should extend beyond its unusual fact pattern of a failed nuclear waste disposal
system, and have immediate application in health care fraud cases and Part D
cases, in particular. Part D includes unprecedented reporting, compliance, fraud
and abuse provisions. It is important to recognize the context of these rigorous
standards; at the same time the government was finalizing the Part D reporting
and compliance requirements, it was engaged in an epic discovery battle in an
FCA litigation with the largest pharmacy benefit manager and mail order
pharmacy, which resulted in a settlement payment of $155 million and significant
injunctive relief. See U.S.
ex rel. Hunt et al. v. Medco Health Solutions, et al
Many Part D requirements specifically address anticipated discovery and
evidentiary issues under an FCA lawsuit.

Although Part D plans have some flexibility in how they
implement compliance programs, an ineffective program may be used to establish
“deliberate ignorance“ or “reckless disregard“ under the FCA’s broad knowledge/scienter
standard. For example, Part D Prescription Drug Plans (PDPs) must have written
policies and procedures, a process to report fraud, corrective action plans and
internal monitoring. The PDPs are required to conduct timely and reasonable
inquiries where evidence suggests there has been misconduct related to payments
or prescriptions. To do this, the plan must account for its subcontractors and
the reliability of the data. Failure to address these points and resolve
problems could be considered evidence of an ineffective program.

Part D’s novel structure is wrought with confusion and
unprecedented requirements that may lead to infractions that, if left unchecked,
could turn into fraud cases. Beneficiary true out-of-pocket cost reporting,
beneficiary access to negotiated pricing, formulary management, payment
adjustments, and coordination of benefit programs under Parts A and B and
Medicaid are just some of the key areas where federal regulators and potential
whistleblowers will focus their efforts.

It would not be surprising to find that whistleblowers already
have filed speculative qui
complaints “predicting“ non-compliance with Part D
to preserve their status in the event the government finds something. That,
according to Rockwell,
is not what is intended under the FCA. Taken to its logical conclusion,
should prohibit whistleblowers from sharing in recoveries based upon vague and
speculative allegations filed as place holders – regardless of a public
disclosure and original source controversy.

Because whistleblowers will not be rewarded under
for “predicting“ fraud, PDPs and those receiving payments under Part D should be
afforded the opportunity to identify and correct problems before they turn into
federal cases. These companies should have a system in place that encourages and
rewards employees for participating in an effective and constructive compliance

David T. Shapiro

Written by

David T. Shapiro

This article is informational only, and should not be construed as legal advice or legal opinion on specific facts.

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