Best Value and the False Claims Act



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Background
There are several types of Capital Medical Equipment (“CME”) that are routinely sold to hospitals and healthcare organizations, including Magnetic Resonance Imaging Scanners (“MRI”), Computed Tomography Scanners (“CT Scanners”), and ultrasound equipment. These products represent a major portion of CME purchases that hospitals and healthcare organization make each year.

CME acquisitions are generally made according to the policies and procedures articulated in the Federal Acquisition Regulations (“FAR”) which allow the Government to solicit competitive pricing for CME acquisition. [1] FAR provides for the “best value” approach in the selection process, which is defined as the expected outcome of an acquisition that, in the Government’s estimation, provides the greatest overall benefit for the Government. [2]

Unlike best price calculations, price is only one factor under the best value approach that the Government can consider in selecting a vendor. The best value approach does not require that the Government receive the lowest or best price. The Government can weigh other factors, such as risk of unsuccessful performance, past performance considerations, of the technical requirements of the solicitation. [3] Even though price is not necessarily the deciding factor, price nevertheless is always considered throughout the best value selection process. The submission of accurate pricing information, therefore, is critical to a fully informed decision by the Government.

Actions involving best value most often occur in two situations: (1) when manufacturers fail to provide accurate pricing data to the Government in their responses to solicitations, and (2) when manufacturers use the product coding and configurations system to distort pricing data, cover up better deals, or otherwise justify better pricing. [4]

Solicitation Information

Manufacturer solicitation packets for acquisition of CME contain discount and pricing disclosure forms that vendors must complete. The disclosures request specific discount and pricing data and are used as part of the overall process to determine best value.

Specifically, the disclosures require the manufacturers to disclose two key areas about pricing. First, the manufacturer must indicate whether the company has discount practices in place for any customer that result in lower net prices than those offered to the Government. Second, manufacturer must also list the best discounts or concessions in relation to the commercial price. The reason for requiring this information is obvious. Armed with this information, Government purchasing agents are able to negotiate and obtain the best value for the Government.

Unfortunately, some manufacturers fail to provide current, accurate, and complete pricing date to the Government. As a result, fraudulent (overpriced) sale of CME to the Government can result, leading to subsequent commencement of an FCA action against the manufacturer. [5]

Coding and Configurations

The considerable number of available pricing configurations, together with the coding system discussed below[6] provide a convenient vehicle for manufacturer fraud. Some manufacturers use the codes and product configurations to distort pricing data, conceal better deals offered to others, or justify better pricing. Pricing of high-tech equipment is based on the product and the cost of any special features, supplemental equipment (e.g., printers), or services that accompany the CME, as well as offsets for trade-in values. Each manufacturer offers a list price for each equipment item, including a base package of specific features or services. The end product, with all of its features, is referred to as a “configuration.” In addition, a system of codes is used to indicate how the actual sales prices are calculated. There are numerous codes for each piece of equipment, and the codes reflect the configurations of the end product, as well as justification for the type of discounts(s) given to each individual buyer.

CME purchase fraud involving the coding and configuration system operates on two levels. First, the manufacturers miscode the end product features to manipulate and distort actual pricing data. Second, during the negotiations process, some manufacturers purposefully fail to provide the Government with accurate pricing information.

The fraudulent manipulation of the configurations and codes is a far more sophisticated and imperceptible fraud than the more obvious activity of misrepresenting the actual discount. Yet it has the same effect-defrauding the Government. These fraudulent practices result in higher prices to the Government. Simply by taking advantage of the complex coding and configuration information, manufacturers sell CME to the Government for hundreds of thousands of dollars more than private purchasers pay for comparable equipment. The manufacturers’ fraud induces the Government into making uninformed and fiscally unsound decisions.

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[1] See: 48 C.F.R. §§ 8, 15. For example, the Veterans Administration (“VA”) will rarely contract for acquisition of capital medical equipment in a sole source environment without a competitive bidding process. As of December 2008, Federal Acquisition Regulation amendments place affirmative duties on entities that are awarded government contracts to create internal policies for disclosure of potentially fraudulent misconduct. Close the Contractor Fraud Loophole Act of 2008, Pub. L. No. 110-252, 122 Stat. 2323 (June 30, 2008). The governing regulations require entities that are awarded government contracts (“Contractors”), which pharmaceutical and other healthcare industry businesses may have obtained through participation in TRICARE and the Federal Employees Health Benefit Plan, to develop a code of business ethics within thirty days of receiving a contract. Poindexter, Presentation for West LegalEdCenter, “ Battling Health Care Fraud: Criminal and Civil Perspectives” (Dec. 17, 2008). See also, 48 C.F.R. § 52.203-13(b).
[2] 48 C.F.R. § 2.101. See also: 48 C.F.R. §§ 8, 15.
[3] 48 C.F.R. § 15.100-102.
[4] See “$9 Million Healthcare Fraud Settlement; Georgia Company Settles Diabetic Supply Fraud Claims Relating to Virginia Subsidiary” (March 8, 2006). Matria Healthcare, Inc. agreed to pay $9 million to the Government to settle allegations of healthcare fraud raised in two separate qui tam actions. Among the allegations were that:
(1) Matria billed the Government for items of durable medical equipment prior to obtaining a valid physician’s order, assignment of benefits, or certificate of medical necessity;
(2 )Matria failed to credit Medicare for returned durable medical equipment;
(3) Matria billed Medicare for shipments of duplicate orders of equipment; and
(4) Matria failed to maintain required signature logs.
“Matria to Pay $9 Million to Settle Medicare Fraud Allegations” (March 13, 2006), available at http://homecaremag.com/news/ Matria_to_Pay_to_settle_Medicare_Fraud_Allegations/ (last visited December 30, 2009).
[5] See Department of Justice, “United States Intervenes in Suit Against Abbott Laboratories, Inc.” (May 18, 2006). In May 2006, the Government intervened in a whistleblower suit filed against Abbott Laboratories, Inc. In its complaint, the Government alleged that Abbott engaged in a scheme to report fraudulent and inflated prices for several pharmaceutical products, knowing that federal healthcare programs established reimbursement rates based on those reported prices. This causes the Government to reimburse Abbott’s customer in excess of $175 million.
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Available at http://www.usdoj.gov/opa/pr/2006/May/06_civ_309.html (last visited December 30, 2009).
[6] See § 5.02[3] supra.
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[i] Author of treatise, Federal False Claims Act and Qui Tam Litigation, Law Journal Press (2010), research source of the issues discussed in this article.

AUTHOR: Joel M. Androphy [i], Rachel Grier, Sarah M. Frazier

Copyright Berg & Androphy
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.