A growing number of False Claims Act (FCA) cases filed against hospitals, nursing homes, home health agencies and ESRD facilities involve claims for Medicare payment that are literally true, i.e., the identified service was provided as described. However, according to the government or a whistleblower, such claims are rendered false by virtue of the provider’s false certification of compliance with applicable law in the provider’s annual cost report. A recent decision by the US Court of Appeals for the Tenth Circuit, however, raises some doubt about the viability of such false certification theories by challenging the position that cost reports are necessarily related to payment.

In United States ex rel. Lacy v. New Horizons, Inc.,¹ the Tenth Circuit affirmed dismissal of a whistleblower action against an operator of 13 long-term care facilities for mentally retarded patients in Oklahoma and Texas. The whistleblower, a former employee, alleged that the defendants had presented false claims to government health care programs and fired her in retaliation for reporting the false claims. The whistleblower alleged that New Horizons engaged in wide-ranging billing improprieties, among them filing annual Medicaid cost reports that included non-reimbursable expenses.

The government declined to intervene in the case and the US District Court for the Western District of Oklahoma dismissed all counts of the whistleblower’s complaint. Specifically with respect to the annual cost report claim, the district court determined that the whistleblower had failed to plead fraud with particularity and failed to state a claim.

The Tenth Circuit affirmed, focusing particular attention on the purpose of the specific Medicaid cost report at issue and concluding that those cost reports were not material to the government’s payment decisions:

While the annual cost reports are mandatory, as the district court found they merely “[c]ollectively . . . establish a basis for evaluation of the reasonableness of the rate paid to the nursing home and determination of what constitutes an economically and efficiently operated facility . . . . ”Thus, the reports would not have led the government to make a payment not otherwise authorized to defendant.²

This reasoning, though focused on the annual skilled nursing facility cost reports required by the Oklahoma Medicaid State Plan, may have a broader application. For example, much of the information provided by providers through Medicare cost reports is also provided for the purpose of permitting the Medicare program to evaluate the reasonableness of its payment rates and making policy determinations unrelated to payment to the reporting facility. Thus, the Lacy decision may be a useful tool for combating assertions that Medicare cost reports, by their very nature, are necessarily related to Medicare payments.

In this regard, it is worth noting that the Lacy decision appears to contradict several federal district court decisions, including two issued just this year. In Mason v. Medline Industries, Inc., the US District Court for the Northern District of Illinois opined, “Because CMS cost reports are an integral part of the Medicare/Medicaid calculus, they constitute claims within the scope of Section 3729.”³ Likewise, in United States ex rel. Kennedy v. Aventis Pharmaceuticals, Inc., a court in the same jurisdiction, relying on the Ninth Circuit’s decision in United States v. Bourseau, remarked that a hospital cost report “may be considered a claim submitted to receive payment.”⁴

Though it is a significant case and potentially quite helpful for FCA defendants, the Lacy decision should not be overread to suggest that cost reports can never be material to any payment decision. Nevertheless, following Lacy, courts should be less inclined to presume a connection between cost reports and payments and more inclined to require FCA plaintiffs to proffer evidence establishing a connection.

If you have any questions regarding the Lacy decision or False Claims Act issues in general, please contact Lisa Estrada, Linda Baumann, David Greenberg or any member of the Arent Fox Healthcare Team.

¹ No. 08-6248, 2009 WL 3241299 (10th Cir. Oct. 9, 2009).

² Id. at *6.

³ No. 07-C-5615, 2009 WL 1438096, *3 (N.D. Ill. May 22, 2009).

⁴ 610 F. Supp. 2d 938, 943 (N.D. Ill. 2009) (citing United States v. Bourseau, 531 F.3d 1159, 1164 n.1 (9th Cir. 2008).