The U.S. Department of Justice (“DOJ”) recently announced that over $5.6 billion in False Claims Act (“FCA”) settlements and judgments had been reached during the 2021 fiscal year, with over $5 billion of those settlements coming from the healthcare industry. This year’s amount is the second largest in history,1 much of which is attributable to Purdue Pharma’s $2.8 billion settlement of allegations of submitting false claims to federal healthcare programs.2
In addition to a record year for FCA settlements, DOJ also announced a shift in its enforcement approach. In October 2021, Deputy Attorney General (“DAG”) Lisa Monaco summarized the enhanced DOJ approach as one that will take a broader view of companies’ past wrongdoing, require companies to provide more detailed information on individuals (harkening back to DOJ’s approach in years past), and allow for the broader use of monitorships. First, DOJ will take into account prior corporate misconduct when deciding the outcome for a company that is being investigated – even minor regulatory transgressions – rather than focusing only on the conduct that is the subject of the initial investigation. Second, for a company to receive credit for cooperating with DOJ, it must provide information regarding each individual involved in the activities contemplated by the investigation – not just those “substantially involved in or responsible for” alleged misconduct. Third, moving forward, there will be no presumption against corporate monitors, and whether a monitor is appropriate will be determined on a case-by-case basis pursuant to the facts and circumstances. DAG Monaco insisted that these changes reflect the beginning, not all, of the changes DOJ is making to address corporate malfeasance and recommended that companies review their compliance programs to ensure they are effectively detecting and remediating misconduct.
With these enhanced measures, we will likely see increased scrutiny and continued expanded use of the False Claims Act in the coming months and years. We have summarized below key enforcement actions impacting the life sciences and healthcare industries in 2021.
HIGHLIGHTS IN LIFE SCIENCES ENFORCEMENT ACTIONS – 2021
Pharmaceutical Manufacturer Enforcement
In addition to the Purdue settlement noted above, there were several pharmaceutical manufacturer enforcement actions in 2021. This included multiple, separate agreements, totaling $447.2 million to settle allegations that three pharmaceutical manufacturers had conspired to fix prices for generic drugs, resulting in inflated claims to federal healthcare programs. Another pharmaceutical manufacturer paid $12.7 million to settle allegations that it directed physicians to preferred pharmacies while the company knew that those pharmacies submitted fraudulent prior authorization requests. In a continuing trend, 2021 also saw an additional drug company pay $12.6 million to settle allegations that it used a charity foundation to funnel payments that would cover the cost of patient copays and financial assistance, including for federal healthcare program beneficiaries – the most recent in a string a cases involving similar conduct in the drug industry. Notably, this most recent matter originated as a qui tam action brought by the company’s compliance officer.
Medical Device Manufacturer Enforcement
Fiscal year 2021 also saw a number of enforcement actions involving medical device manufacturers, highlighting two key areas:
Continued Anti-Kickback Statute Enforcement. Several medical device settlements in 2021 involved the alleged payment of kickbacks from medical device manufacturers to physician users of their products. For example, a device manufacturer paid $16 million to resolve allegations that it made payments to an orthopedic surgeon in the form of royalty payments in order to induce the use and recommendation of the manufacturer’s devices, thus resulting in FCA and Anti-Kickback Statute violations. Another settlement involved alleged kickbacks paid to a non-practicing physician who was the medical director and chief executive officer of large medical practice. In exchange for directing physicians to use the manufacturer’s devices and increase the number of surgeries performed at the practice, the government alleged, the physician was paid kickbacks in the form of cash payments, all-expense paid trips and sales commissions. The physician and the device manufacturer paid $3 million and $1.2 million, respectively, to settle these claims.
Two settlements in 2021 highlight the use of the U.S. Physician Payments Sunshine Act as a tool for uncovering kickbacks. They also are examples of the government enforcing the Sunshine Act’s requirements. The first settlement involves two medical device distributorships owned by a physician allegedly engaged in multiple kickback schemes. The first alleged scheme involved the physician-owned distributorships paying the physician owner profit distributions in exchange for using the distributorships’ devices in surgeries. The second alleged scheme involved one of the distributorships sharing profits with the physician owner when the distributorship resold other manufacturers’ devices. As a result, the physician owner and the affiliated distributorships paid $4.4 million, and the device manufacturer paid $9.21 million, to resolve FCA allegations. The second settlement involved a French manufacturer that allegedly paid non-disclosed kickbacks in the form of entertainment for U.S.-based physicians during a conference in France. To resolve these allegations, the manufacturer paid $2 million.
Product Quality Issues. In addition to the kickback matters cited above, DOJ also settled two high-profile matters with medical device companies in 2021 related to the sale and promotion of defective products. The first settlement involved two device manufacturers paying $38.75 million for allegedly submitting false claims to Medicare for defective devices. Beginning as late as 2008, one of the companies allegedly knew that its software contained a serious defect. The company continued to sell these devices until 2016 when they were recalled following a Class I product recall.
The second settlement involved a manufacturer selling allegedly defective heart devices that were used on patients covered by federal healthcare programs. While the manufacturer submitted a request to the Food & Drug Administration (“FDA”) to change the battery design for its device, it continued to sell devices that did not incorporate the updated design. For its alleged knowledge of the faulty battery design, continued sale of the devices, and failure to disclose adverse health events associated with the early depletion of the battery in its devices, the manufacturer paid a $27 million settlement.
A clinical laboratory in California paid $2.5 million to settle allegations that it billed genetic tests that were conducted as a result of a kickback scheme. The government alleged that the laboratory entered into agreements with a marketing company to use the laboratory’s services for tests ordered by the marketing company’s clients. The marketing company allegedly paid kickbacks for each test that was reimbursed by Medicare. Another case involves the entry of a final FCA judgment against the owner of a North Carolina-based lab. Allegedly, the lab provided benefits to healthcare providers in exchange for referring drug tests. The former owner agreed to pay $4.5 million to resolve the allegations. Two other defendants, one owner and one employee, entered into settlement agreements for $2 million and approximately $650,000, respectively.
HEALTH TECHNOLOGY ENFORCEMENT ACTIONS
Digital Health/Health Tech Enforcement
An electronic health record (“EHR”) technology vendor settled FCA claims for $18.25 million. The vendor allegedly provided free tickets to various recreational events to current and prospective clients and paid existing customers for the referral of new customers. A customer could earn up to $3,000 for each referred client.
Another settlement involved allegations that a Florida-based EHR vendor violated the FCA through a marketing referral program that paid the EHR vendor’s clients cash bonuses, cash-equivalent credits, and percentage-based payments for the referral of new clients. To settle these allegations, the EHR vendor paid the U.S. Government $3.8 million.
In September 2021, DOJ announced criminal charges against 138 defendants, including 42 doctors, nurses, and other licensed healthcare professionals involved in $1.4 billion in fraudulent activity, with approximately $1.1 billion involving telemedicine. Primarily at issue are allegations that telehealth providers did not engage in sufficient patient interaction. The false claims included alleged schemes where telemedicine companies would pay prescribing healthcare professionals to order medically unnecessary durable medical equipment, testing materials and medications.
PRIVATE EQUITY ENFORCEMENT ACTIONS
Recent years have seen an increase in DOJ and whistleblowers pursuing claims against private equity owners based on alleged false claims submitted by their healthcare and life sciences portfolio companies. 2021 saw continued activity in this area, which DOJ has described as an enforcement priority.
Most recently, in October 2021, we saw the largest False Claims Act settlement ever reached with a private equity firm. The firm paid nearly $20 million to settle FCA claims related to a portfolio behavioral health company. The company allegedly billed Medicaid for services provided by individuals who were not supervised in accordance with Massachusetts Medicaid regulations. The conduct was alleged to have pre-dated the firm’s acquisition. DOJ declined to intervene in the case, but the whistleblower pursued the federal claims and the Massachusetts Attorney General’s Office pursued the state claims.
2021 saw other settlements in FCA matters in which DOJ did intervene involving private equity firms in the healthcare space. First, a private equity firm paid $1.5 million to settle claims that a company it acquired continued activities that violated the FCA after it was acquired in 2012. DOJ alleged that the company’s activities included the use of medical technology for indications that were not approved by the FDA. This alleged improper promotion resulted in false claims being submitted to federal healthcare programs. According to DOJ, the private equity firm was responsible because it failed to stop the allegedly improper sales and promotion activities after it acquired the company. Second, a private equity firm paid $1.8 million to settle allegations that it violated the FCA.
In 2022, we can expect to see a continued increase in corporate criminal enforcement, driven by the policy changes that DOJ announced, and including continued pursuit of kickback and false claims settlements and enforcement actions involving pharmaceutical, medtech and private equity entities. We can also expect to see a reinvigorated focus on individual accountability in these cases, including at the executive level. Goodwin’s lawyers will continue to track and report on these developments.
1 The largest recovery occurred in 2014 ($5.69 billion recovered). More recently, DOJ recovered approximately $2.2 billion in fiscal year 2020 (approximately $1.8 billion of which was related to the health industry) and approximately $3 billion in fiscal year 2019 (approximately $2.6 billion of which was related to the health industry).
2 Fiscal year 2020’s reported FCA recoveries of $1.8 billion in the health industry may have been impacted by the COVID-19 pandemic.