A New Jersey federal court judge ruled this week that compliance with Medicare rules is a condition of payment. The ruling potentially expands the scope and reach of the False Claims Act and adds more controversy to the “implied certification” theory of claims. The ruling was issued by Chief U.S. District Court Judge Jerome Simandle in a case pending in Camden, New Jersey (United States of America ex. rel Victoria Druding, et al., v. Care Alternatives). To our knowledge this is a case of first impression in the Third Circuit, at least as to hospice care.

To understand the ruling, some factual background is necessary.  Victoria Druding and three of her co-workers were employed at Care Alternatives, a for profit hospice care provider located in Cranford, New Jersey. The four claimed that Care Alternatives defrauded both Medicare and Medicaid by among other things, misdiagnosing patients so that they appeared to qualify for hospice care.

Federal regulations impose strict eligibility standards for hospice care in order to receive government funds. Generally, doctors must certify that patients are terminal and within the last six months of their lives. A recent study found that a large percentage of hospice patients now spend 3 years and sometimes more in hospice care. This causes a huge burden on state and federal healthcare funding.

The four whistleblowers, called “relators”, filed claims under the federal and New Jersey False Claims Acts. Those laws allow an individual to file a lawsuit on behalf of the government. If successful, the four will be entitled to up to 30% of whatever is ultimately collected from Care Alternatives.

The lawsuit claims that Care Alternatives used a variety of tricks to bring new patients into their residential care facilities. Some of the patients didn’t meet hospice eligibility criteria, however. The suit says staff were directed to “manipulate and/or change” patients’ diagnoses to qualify for coverage under Medicare’s Hospice Participation Eligibility Guidelines. The alleged fraud includes “re-writing” medical records and falsely creating missing records.

The suit also claims that nurses were told to back date paperwork and change records to keep patients in the program.

Additional allegations not part of this article include paying kickbacks and giving “perks” to doctors, nursing home administrators and social workers to induce referrals. According to the complaint, gifts were given to “bring in the bodies.”

Apparently these efforts were successful. The four whistleblowers documented many patients they claim were receiving services that were not medically necessary.

The initial lawsuit was filed in 2008 and later amended in 2013. After a long 7-year investigation, the Justice Department decided not to intervene. Often that ends a case but not this one. The relators elected to continue on their own.

Soon after the government declined to intervene, Care Alternatives was served with the complaint and filed a motion to dismiss. This article only concerns the allegations of the eligibility guidelines including altering records and misdiagnoses. It does not the kickback claims.

To bring a False Claims Act case, the relators must prove that Care Alternatives a) presented or caused to presented to an agent of the United States a claim for payment b) that was false and fraudulent. They must also prove that c) Care Alternatives knew the claims were false.

Liability can attach for claims that are either factually false or legally false. A claim is factually false if the person submitting the claim misrepresents the goods or services presented to the government. For example, a contractor who supplies Chinese steel on a highway project requiring U.S. made steel is misrepresenting the goods presented to the government. There is no claim of factual misrepresentations at issue here.

That leaves claims that are legally false. A Medicare claim is legally false when a provider falsely certifies that it has complied with a rule or regulation. Legally false claims are common in Medicare fraud cases.

Care Advantage argues that at most, the allegations of the lawsuit only suggest a violation of a condition of participation in the Medicare program. They argue that none of the alleged violations allege they violated a condition of payment. Their argument was quite novel but for the reasons discussed below, rejected by the court.

The relators countered Care Advantages’ arguments and said that the Medicare regulations regarding patient eligibility were a condition of payment. If a patient isn’t eligible for hospice care, Care Advantage can’t seek Medicare or Medicaid reimbursement. Although the government did not intervene in the case, it did join in the relators’ arguments.

Existing case law suggests that violating a condition of participation can only be prosecuted by Medicare and the government. In other words, certain regulations cannot be enforced by private parties in a whistleblower action filed under the False Claims Act. Absent a false claim for payment, a False Claims Act complaint will fail.

Although the hospice eligibility rules are called “The Medicare Conditions of Participation for Hospice Care,” the Medicare law conditions payment for hospice care on a written certification from a doctor and supporting medical documentation. If a provider misdiagnoses, alters paperwork or creates phony paperwork, it can’t seek payment. In other words, the conditions of participation were such that they equate to a condition of payment.

This decision is a major victory for the four whistleblowers but they are not in the clear just yet. The court ruled that some of their claims were not pleaded with sufficient specificity. They will be allowed, however, to file an amended complaint to cure the defects.

Ultimately, their victory may be short lived because of a pending Supreme Court case on these same issues. The U.S. Supreme Court is expected to take up this so called “implied certification” theory of liability later this year. Universal Health Services v. United States ex rel. Escobar. One of the questions the Supreme Court has agreed to hear is whether a Medicare rule must explicitly state that it is a condition of payment in order for there to be liability under the False Claims Act.

Until the Supreme Court rules, hospice care and other healthcare providers are on notice that fudging program eligibility documentation may be more than enough to trigger the harsh sanctions of the False Claims Act.