The False Claims Act (FCA): Where We Are, And What s Ahead

The False Claims Act (FCA): Where We Are, And What s Ahead Tuesday, March 14, 2017 @ 12:00 pm ET Host: Mark Burroughs Guest: Peter Hutt II, Covington & Burling LLP

Preface Welcome to Deloitte s Trending Now, a webcast series on government contracting hot topics. Mark your calendars: We will hold webinars the second Tuesday of each month at noon. Feedback: If you have comments, questions, or ideas for hot topics, please feel free to send to Mark Burroughs at mburroughs@deloitte.com. As used in this document, Deloitte means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 2

Speaking with you today Mark Burroughs is a managing director with Deloitte & Touche LLP in the McLean, Virginia office. Mark has over 20 years of experience in providing auditing and consulting services to government contractors and has helped companies understand and develop practical solutions when dealing with matters associated with Defense Contract Audit Agency (DCAA) audits, the Federal Acquisition Regulation (FAR) and the Cost Accounting Standards (CAS). Prior to joining Deloitte, Mark was a Senior Auditor at the DCAA and holds a MBA from Loyola College. Mark Burroughs Deloitte Advisory Managing Director mburroughs@deloitte.com Mark is a CPA in the states of Maryland and Virginia and a member of the American Institute of Certified Public Accountants. Mark is also active in the Professional Services Council (PSC) and the National Defense Industry Association (NDIA). Peter Hutt advises clients on a broad range of federal government contract and grant matters, and also represents clients in False Claims Act and fraud litigation. He has testified before Congress concerning proposed amendments to the False Claims Act. Mr. Hutt represents clients in the full range of contract and grant matters, including contract formation, contract disputes and claims, terminations, cost allowability and allocability issues, contract financing issues, price reduction issues, subcontracting, compliance issues, and small business issues. He has litigated significant contract matters in the Court of Federal Claims and the Armed Services Board of Contract Appeals. Peter Hutt Covington & Burling LLP Partner PHuttJr@cov.com Mr. Hutt has litigated more than 20 qui tam matters brought under the False Claims Act, including matters alleging Iraqi procurement fraud, cost misallocation, quality assurance deficiencies, substandard products, defective pricing, health care fraud, and false certifications. He has conducted numerous internal investigations and frequently advises clients on whether to make disclosures of potential wrongdoing. Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 3

Overview I. FCA enforcement statistics II. Impact of Supreme Court 2016 Escobar ruling III. Trump Administration effects on FCA enforcement IV. Other FCA developments Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 4

Has your company been subject to an FCA action in the last two years? A) Yes, went to trial B) Yes, we settled C) Yes, but the government is no longer pursuing D) Yes, currently dealing with issue E) No, continuing to hold my breath F) Not sure Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 5

Total FCA cases filed 900 800 700 600 500 400 Qui Tam Non-Qui Tam 300 200 100 0 Source: Department of Justice; https://www.justice.gov/opa/press-release/file/918361/download Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 7

Total FCA Collections $7 $6 $5 Billions $4 $3 Qui Tam Non-Qui Tam $2 $1 $0 2008 2007 2010 2011 2012 2013 2014 2015 2016 Source: Department of Justice; https://www.justice.gov/opa/press-release/file/918361/download Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 8

FCA Collections By Defendant Industry $7 $6 $5 Billions $4 $3 "Other" DoD HHS $2 $1 $0 2008 2007 2010 2011 2012 2013 2014 2015 2016 Source: Department of Justice; https://www.justice.gov/opa/press-release/file/918361/download Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 9

FCA Statistics Overview Key Takeaways Number of FCA cases still on the rise, driven by increase in cases initiated by qui tam relators Marked increase in value of DOJ collections in recent years, reflecting increase in cases with large settlements Increased FCA collections since 2012 mainly attributable to increased enforcement in financial industry, not HHS or DoD Individual liability is on the upswing: DOJ also identified several individual defendants who had settled FCA matters for between $250k and $9.35M Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 10

Examples of settlements in 2017 2/16/2017 $ 1.7M Oncology practice charging Medicare for unapproved chemotherapy drugs 2/15/2017 $14.9M Misclassifying costs and inflating overhead rates under government contracts 2/10/2017 $ 750k Doctors billing for medically unnecessary services 2/9/2017 $ 860k Medicare - kickbacks 2/9/2017 $ 300k Underreporting oil royalties payable under federal lease 2/8/2017 $ 3.8M Double-billing and mischarging for medical services under IRS contract 2/7/2017 $ 18M Medically unnecessary services and kickbacks 2/6/2017 $ 60M Upcoding medical services 2/6/2017 $1.5M Overstating travel time and mileage reimbursable under government contracts 2/2/2017 $ 20M Medically unnecessary tests Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 11

Examples of settlements in 2017 (cont d) 2/1/2017 $ 1.17M Mismanaging NSF grants and charging unallowable and unsupported costs 2/1/2017 $ 3.81M Medically unnecessary tests 2/1/2017 $ 100k Substandard care provided to nursing facility residents 1/27/2017 $ 17M Medically unnecessary services and unlicensed staff 1/23/2017 $ 5.275M Charging false overtime and premium pay under government contract 1/19/2017 $ 845k Improper stent procedure charges 1/19/2017 $ 50M Pharmacy Anti-Kickback violations 1/13/2017 $ 12.7M Unnecessary ambulance services 1/12/2017 $ 18M Sale of adulterated drugs 1/11/2017 $ 350M Kickbacks to induce overuse of skin product Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 12

Supreme Court Escobar decision Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (June 16, 2016) Health care matter where provider used unlicensed and unsupervised staff to provide mental health services, contrary to regulation Most significant FCA case in 25 years, because addressed core question of definition of false claim Holding 1 affirming implied certification liability Claims can be false at least where two condition are satisfied o o Defendant makes specific representations in submitting a claim, but Fails to disclose its violations of statutory, regulatory, or contractual requirements Defendant s omission makes those representations misleading half-truths Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 14

Supreme Court Escobar decision (cont d) Holding 2 on Materiality When evaluating materiality under the FCA, the government s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Government payment history is crucial o o One way to prove materiality is to show that the defendant knows that the government consistently refuses to pay claims based on noncompliance with the requirement at issue. Conversely, if the government regularly pays a particular type of claim despite actual knowledge that certain requirements were violated that is strong evidence that the requirements are not material. Court emphasized that materiality is a demanding standard for the government or relators to meet Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 15

Current state of play Implied certification DOJ position: Escobar did not hold that implied certification liability requires half-true specific representations in all cases Defendant position: DOJ view would make Escobar meaningless; it was intended to provide guidance as to legal theory Courts: Most (but not all) agree that specific misleading representations needed Materiality DOJ position: Escobar did not change existing FCA definition of materiality (whether violation has natural tendency to affect payment), and advocates multi-factor test for materiality Defendant position: Escobar directs courts to look to actual government payment history, not abstract objective standard Courts: Some have dismissed cases on basis of government knowledge; others have refused to dismiss because violations were conditions of payment Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 16

Avoiding implied certification liability Examine claims for payment and accompanying certifications o Where possible, avoid making specific representations that could be characterized as half-truths o Omit all information not specifically required o Alternatively, be precise about what is being represented, and ensure compliance with all requirements addressed in claim Note: Specific representations about compliance will always be actionable under express certification theory of liability Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 17

Addressing materiality Generate record of government knowledge of course of conduct, and payment history o Written record essential, rather than oral assurances or anecdotes o Which government official knows the facts is important; DOJ takes position that only the actual decisionmaker s knowledge counts Consider written disclosures to agency officials to provide record of government knowledge Consider use of Freedom of Information Act to determine government payment history to similarly situated entities Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 18

Has your company taken any action since June 2016 as a result of the Escobar case? A) Yes, we have discussed internally B) Yes, we have taken steps to address materiality C) No, continuing to hold my breath D) Not sure Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 19

Impact of Trump Administration Question: Which philosophy prevails? Reduce regulations Scaled-back FCA enforcement in keeping with view that the government should limit burdens on businesses Budget hawk Increased enforcement activity to make good on promises to recover funds lost to fraud, waste and abuse Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 21

New DOJ / Supreme Court players Jeff Sessions, Attorney General Based on his testimony to Congress: Indicates support of FCA e.g., during confirmation hearings told Sen. Grassley FCA was an effective method of rooting out fraud and abuse that has saved this country lots of money. Seems to favor more rapid DOJ decisions on qui tam cases Statement in favor of Yates memorandum Deputy Attorney General Rod Rosenstein No clear disposition, but prosecuted numerous FCA cases as U.S. Attorney for Maryland (under Democrats and Republicans) Associate Attorney General Rachel Brand Based on her tenure in Chamber of Commerce, she may favor business-friendly approach Likely new Supreme Court Justice Neil Gorsuch Limited FCA decisions yield few insights There is some hope he will apply procedural bars more broadly (wrote opinion affirming dismissal under public disclosure bar) Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 22

Other questions Yates Memo: Will DOJ continue recent emphases on 1.Holding individuals accountable? 2.Considering both civil and criminal actions to address issues? 3.Seeking more disclosures? Increase in spending on defense and infrastructure: Will this be accompanied by a push to enforce greater accountability on recipients of funds? Repeal / Replace of ACA: Will the anticipated repeal of ACA include repeal of FCA provisions? o Changes to public disclosure bar o Clarification of 60-day rule within which Medicare/Medicaid overpayment are to be repaid Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 23

What do you expect to happen under the new administration? A) More aggressive pursuit of FCA B) No change C) Less aggressive pursuit of FCA D) Not sure, continuing to hold my breath Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 24

Increase in penalty range Per-claim penalty range since 1999: $5,500 $11,000 New range set by DOJ : $10,781 $21,563 Increased range applies prospectively To be increased annually in future, pegged to the Consumer Price Index (CPI) Will be subject to legal challenge Increased penalty amounts will lead to more litigation over constitutionality of specific penalty impositions o Excessive fines clause of Eighth Amendment prohibits penalties that are out of proportion to harm to government Increased penalty amounts will play only limited role in FCA settlement negotiations Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 26

FCA Trials Defendants going to trial with mixed results: Loss: SeaCrest nursing homes in Florida allegedly defrauded Medicare; $347 million awarded to Relators after jury found liability Loss: Trinity case in Texas concerned allegedly defective guardrails; $663 million awarded after jury found liability Loss: Allied (mortgage company) in Texas allegedly used unapproved shadow branches; jury found $92 million in single damages Win: Healthcare products provider won jury case in Texas alleging charges for unapproved uses of medical devices Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 27

Do you think your company would consider going to trial on an FCA case? A) Yes, definitely B) Would depend on the case C) Settle, settle, settle D) Not sure, continuing to hold my breath Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 28

New enforcement patterns US Attorney offices increasingly taking lead or significant role in FCA matters o Statistics mask role of local US attorney offices, because their matters are not included in statistics o Main Justice resources stretched o AUSAs often take different approach than attorneys from Civil Fraud section in DC New types of firms prosecuting qui tam matters o o Quinn Emanuel, Kellogg Huber Often take different approaches than historical whistleblower firms New types of qui tam plaintiffs o More corporations, rather than individuals, as plaintiffs o More special-purpose entities as plaintiffs Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 29

Possible increased DOJ focus on corporate compliance DOJ Criminal Fraud Section released new guidance on corporate compliance programs (Feb. 8, 2017) o o o Follows hiring of compliance expert Hui Chen Provides further guidance about criminal prosecutors review of compliance programs E.g., focus on resources, autonomy of compliance personnel, tailoring of program, tracking of metrics, responses to red flags Open question whether this suggests Civil Fraud may also give consideration to corporate compliance programs in resolving civil FCA matters Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 30

Consequences for bad acts Supreme Court considered whether a relator s violation of FCA seal requirement requires dismissal of the action in a case involving a large insurance company (2016) o o Dismissal not automatically required Court left open possibility that dismissal would be appropriate depending on circumstances Violation of seal provision can lead to prosecution o o o Law firm partner tried to sell sealed qui tam complaint to target defendant Target corporation contacted FBI Would-be seller arrested, faces criminal prosecution Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 31

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2017 Deloitte Development LLC. All rights reserved. The False Claims Act: Where We Are, And What s Ahead 33 36 USC 220506