False Claims Act Summary Judgment Issued by Tennessee Federal District Court Against Imaging Company for Failure to Follow Medicare Rules


The U.S. Attorney's Office in Nashville, Tennessee, arguably the capital of the investor-owned healthcare industry, is taking on healthcare providers and winning. In a series of summary judgment rulings over the past year, the federal district court has assessed tens of millions of dollars in damages and penalties under the federal False Claims Act (FCA). In these cases, the court found that the defendants flagrantly violated clearly written provisions of Medicare rules. The lesson from these cases is not a new one: regardless of whether a practice is common in the industry, if a whistleblower pulls together a case showing that a provider has violated the plain reading of the rules, the provider will lose.

In the most recent case, United States ex. rel. Hobbs v. MedQuest Associates, Inc., the court granted the government's motion for summary judgment, assessing False Claims Act penalties of $11,000 per claim for all claims submitted to the Medicare program for which the facility did not have the requisite physician supervision at the affected independent diagnostic testing facility (IDTF), and $5,000 per claim for all claims submitted by a MedQuest-affiliated IDTF that failed to provide timely notice of a change of ownership/control to the Medicare carrier and continued to bill using the seller's Medicare number.

Physician Supervision

Medicare requires that all diagnostic tests provided in an IDTF have adequate physician supervision. There are ascending levels of supervision – general, direct and personal – and each level is dictated by the risks posed when performing a particular test. Certain tests like a MRI, which requires the injection of contrast materials, pose greater health risks and require a higher level of physician supervision. Moreover, when an IDTF enrolls as a Medicare supplier, it must list all tests to be performed, the type of equipment at the center, and specific information related to the credentials of the proposed supervising physician. If the Medicare Administrative Contractor (MAC) determines the application to be sufficient, including the quality of the equipment and the qualifications of the physicians, it enrolls the entity. Subsequently, any change in the identity of the supervising physician, equipment or list of services must be reported to the MAC on a Form 855B. The intent of course is to ensure that the beneficiaries receive and Medicare pays for quality diagnostic services.

The Court found that MedQuest not only failed to update its 855 filings to identify the physicians supervising the tests performed at a center, but routinely had no physician on site when performing risky diagnostic procedures. The Court determined that physician supervision constituted a "condition of payment," and Medicare would not have paid at all for services provided without appropriate physician supervision. Therefore all tests performed without the appropriate physician supervision constituted a false claim under the FCA. Penalties of $11,000 per claim were assessed, in addition to treble damages of the amount claimed.

Change of Ownership

The Court also found that MedQuest violated the FCA by failing to notify the MAC of the acquisition, and the continued use, of the prior owner's billing numbers for 18 months after the acquisition. In January 2004, MedQuest purchased the stock of William Witt, Inc., a business corporation, and did not to file a Form 855 Change of Information until June 2005. During that period MedQuest continuously billed for services under the seller's Medicare number. The Medicare change of ownership regulations state that a stock transfer is not a change of ownership because when a buyer purchases a corporation's stock, the corporation continues to exist (with the same tax identification number), and therefore, no new billing number is ordinarily issued. In this case, however, the Court created a distinction between a business corporation owned by a physician and one owned by MedQuest to operate an IDTF, finding that the physician's corporation was akin to a medical practice. The Court judged MedQuest's failure to file a change of information (Form 855B) within 30 days to enroll as an IDTF to constitute reckless disregard of the Medicare notice requirements. The court also found that the continued billing during the 18-month period was reckless, and therefore, all the claims billed under the seller's numbers were false claims, and $5,500 per claim submitted for the 17 months the entity operated without filing the appropriate notice was appropriate.

The Court determined that full penalties were appropriate, given the sophistication of the acquirer, the failure to provide the appropriate level of physician supervision and the operator's disregard for the federal regulations.

In recent public statements, the US Attorney's Office for the Middle District of Tennessee has made clear it intends to increase and intensify health care enforcement activities in the Middle District of Tennessee. Recent results show that not only will the Office pursue viable cases, but it can put together winning summary judgment arguments to achieve victory before trial. The lesson for providers is to ensure that operations comply with every statute, rule, regulation and local medical review policy or the alternative could be significant penalties.

For additional information, please contact Jennifer Weaver, Patsy Powers or any member of the Waller Lansden Healthcare Department at 800-487-6380.