Attorney East Hampton

By Anne K. Walsh —

In a thorough and thoughtful 23-page opinion, Judge Steven Merryday of the Middle District of Florida dismissed a $350 million judgment against the defendants, owners and operators of specialized nursing facilities. The court detailed the rigorous materiality and scienter requirements for liability under the False Claims Act that the U.S. Supreme Court “defined unambiguously and required emphatically” in Universal Health Services, Inc. v. Escobar, 136 S. Ct. 1989 (2016):

Escobar necessarily means that if a service is noncompliant with a statute, a rule, or a contract; if the non-compliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance, the False Claims Act provides a relator no claim for “implied false certification” (although some other claim, maintainable by the United States in its own name, or some regulatory authority, exercisable by the United States, might attach under other law).

In other words, a False Claims Act claim cannot be based on a “minor or unsubstantial” or “garden-variety” regulatory violation; to do so would result in a system of “government traps, zaps, and zingers” that permits the government to retain the benefit of a “substantially conforming” good or service, and to recover under the False Claims Act damages (up to treble times) due to the immaterial regulatory non-compliance.

In United States ex rel. Ruckh v. Salus Rehabilitation, LLC et al., No. 8:11-cv-01303-SDM-TBM (M.D. Fla. Jan. 11, 2018) (Merryday, J.), the relator alleged the nursing facilities violated Medicaid regulations, which rendered fraudulent its claims to the Medicaid program. The alleged non-compliances involved a failure to maintain a comprehensive care plan and a failure to keep proper records of services. After trial, the judgments against defendants totaled $350 million.

In its opinion, the court found compelling the entire absence of evidence of how the government has behaved in comparable circumstances. Given the lack of evidence, the jurors returned “an unwarranted, unjustified, unconscionable, and probably unconstitutional forfeiture – times three – sufficient in proportion and irrationality to deter any prudent business from providing services and products to a government armed with the untethered and hair-trigger artillery of a False Claims Act invoked by a heavily invested relator.”

The court, like many now since Escobar, agreed that Escobar requires that the relator prove “both that the non-compliance was material to the government’s payment decision and that the defendant knew at the moment the defendant sought payment that the non-compliance was material to the government’s payment decision.” Absent this evidence, a False Claims Act cannot stand – whether at a motion to dismiss stage, summary judgment stage, or like in Ruckh, past jury trial and judgment.

By Andrew J. Hull —

It was a somewhat unsettling year for the Drug Enforcement Administration. The Agency faced a barrage of criticism in the press regarding its involvement in passage of the Ensuring Patient Access and Effective Drug Enforcement Act (EPAEDEA), which some criticized as hobbling DEA’s immediate suspension order (ISO) authority (see here). Meanwhile, notwithstanding a D.C. Circuit “win” for the Agency in Masters Pharmaceutical, Inc. v. Drug Enforcement Administration, 861 F.3d 206 (D.C. Cir. 2017), where the court set forth new and significant suspicious order monitoring and reporting requirements, the industry still decried the lack of clarification to DEA’s suspicious order reporting regulations—promulgated by notice-and-comment rulemaking—something the Agency has been promising for years (see post here).

Regardless, DEA’s Diversion Control Division has continued to bring administrative revocation and registration denial cases (see post here for a general description) against DEA registrants (typically practitioner cases). According to DEA, the number of administrative cases brought in 2017 was more than double the number brought in 2014.

Based on our review of the published decisions this year, here are some statistics on DEA’s 2017 administrative docket:

• 46: Number of new final orders (up from 28 in 2016)
• 44: Number of new final orders adjudicating individual (e.g., doctor, dentist, veterinarian) registrations (a pharmacy and a clinic made up the remaining two final orders)
• 1: Number of ISO cases
• 29: Number of cases based solely on loss of state authority (see post here) (up from 15 in 2016)
• 17: Number of cases where the respondent made a timely request for a hearing (i.e., before an ALJ)
• 13: Number of cases with a timely request for a hearing that were decided on summary disposition (i.e., without a hearing)
• 3: Number of cases where the Administrator rejected the presiding ALJ’s recommended decision
• 0: Number of corrective action plans that DEA has accepted (see DEA statement here)

It is important to note that these statistics do not take into account administrative actions where a party surrendered a registration prior to DEA initiating proceedings or cases that DEA and the registrant settled without going to a hearing.

Our readers know that we closely follow DEA’s administrative decisions, and we are committed to keeping you up to date on significant developments in these decisions. Here are some of the highlights of our posts from 2017:

• DEA’s concerning and questionable expanded use of summary disposition to decide cases other than those solely based on a loss of state authority (see posts here and here)
• DEA’s use of official notice (see post here)
• DEA’s finding that the two key elements of a valid prescription contained in 21 C.F.R. § 1306.04(a)—(1) issued for a legitimate medical purpose (2) by an individual practitioner acting in the usual course of professional practice—have no material difference (see post here)
• A new set of requirements (not contained in the regulations) that require practitioners to investigate whether their registrations are being misused for diversion (see post here)

As we embark on a new year, we will continue to keep you posted on new decisions as they are published.

By Allyson B. Mullen —

While many were on vacation and preparing to celebrate the New Year, CDRH was announcing yet another pilot program. You may recall FDA recently announced its Digital Health Software Pre-Cert Pilot Program and its Premarket Approval Application Critical to Quality Pilot Program.  The latest pilot program is the Case for Quality Voluntary Medical Device Manufacturing and Product Quality Pilot Program.  The program was announced in the Federal Register.

This pilot program, like others that have come before it, intends to evaluate alternative means of assessing a device company’s quality system. In this program, CDRH has collaborated with the Medical Device Innovation Consortium (MDIC) to develop a “maturity model and appraisal system,” the Capability Maturity Model Integration (CMMI) system.  Details regarding the CMMI system are absent from the Federal Register notice.  Prospective participants would be well-advised to better understand this system prior to enrollment.  Program participants will be required to perform a gap assessment using the CMMI system.  In exchange, FDA intends to forego conducting surveillance inspections of program participants.

CDRH will select up to nine companies to participate in this program, and it began taking applications for enrollment on January 2. The program is scheduled to run through the end of 2018.

By Allyson B. Mullen —

Section 513 of the Federal Food, Drug, and Cosmetic Act requires FDA to consider the least burdensome means of evaluating device safety and effectiveness for Class III devices and substantial equivalence for devices requiring 510(k) clearance. Despite this legal requirement, the device industry’s position has been that FDA does not comply with the provisions to require only the “least burdensome” means of establishing device effectiveness or substantial equivalence.  It has often seemed that CDRH was paying lip service to the concept of “least burdensome,” using the phrase but not actually applying it.  The 21st Century Cures Act (Cures), signed into law last December, added language requiring CDRH to assess the implementation of the least burdensome provisions “to ensure that the least burdensome requirements are fully and consistently applied.”

As part of this implementation, on December 15, CDRH issued a revised draft guidance regarding the Least Burdensome provisions.  Once finalized, this guidance will replace FDA’s October 2002 guidance, “The Least Burdensome Provisions of the FDA Modernization Act of 1997: Concept and Principles.”

The draft guidance applies a new definition of “least burdensome,” defining it as “the minimum amount of information necessary to adequately address a regulatory question or issue through the most efficient manner at the right time.” In contrast, the 2002 guidance defined least burdensome as “a successful means of addressing a premarket issue that involves the most appropriate investment of time, effort, and resources on the part of industry and FDA.”  The earlier definition focused on premarket issues, whereas the new guidance is broader.  The scope of the draft guidance includes all premarket submissions, including de novos and Q-submissions, neither of which were expressly included in the 2002 guidance.  Both guidances also cover other regulatory obligations, including, for example postmarket surveillance and post-approval studies.

Although Cures was directed at CDRH, the Center has turned around and applied the concepts to industry. The draft guidance emphasizes that least burdensome applies not only to FDA but also to industry. The guidance states that industry should “submit well-organized, clear, and concise information” that is least burdensome to review.  In practice, it is difficult for industry to predict the minimum amount of information necessary in a premarket submission because the Agency continues to request new and different information to establish a reasonable assurance of safety and effectiveness or substantial equivalence.

The new guidance, like the 2002 guidance, provides a number of examples of how FDA has and will apply its least burdensome provisions. The draft guidance utilizes more recent examples of the least burdensome provisions as compared to the 2002 guidance.  For example, the guidance references use of real world evidence, a current hot topic within the Agency.  With these more recent examples, however, some of the more basic examples from the 2002 guidance have been lost.  For example, the 2002 guidance clearly indicated that 510(k) submissions do not need to include manufacturing information.  This same information is not in the 2017 draft.  This document will supersede what FDA said before.  We recommend that FDA include the examples from the 2002 guidance to the extent that they reflect current policy.  In general, we find the new examples to be helpful; however, omitting examples that have been useful in the past will mean a loss of useful illustrations and could potentially create confusion as to whether leaving out the examples means CDRH has changed its policy.

By Anne K. Walsh —

To prevail on an allegation under the False Claims Act (FCA), a plaintiff must allege that the misrepresentation by defendant was “material to the Government’s payment decision.” Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  The U.S. Supreme Court explained that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” Id. at 2003.

As reported last year, there has been a trend to narrow the types of FCA theories that could survive the more stringent test for materiality established by Escobar, with several circuit courts requiring a rigorous scrutiny of the government’s behavior once it became aware of the alleged misrepresentations.  In July 2017, however, the Ninth Circuit bucked the trend, and concluded that whether allegations are material raised matters of proof that could not be resolved on the pleadings (i.e., at the motion to dismiss stage). See United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017).  The Ninth Circuit’s view was that the plaintiffs alleged “more than the mere possibility that the government would be entitled to refuse payment if it were aware of the violations,” and that was sufficient for materiality purposes “at this stage of the case.”

The U.S. Supreme Court now may be poised to provide further clarity on the materiality required for FCA liability. Gilead requested, but was denied, a rehearing en banc.  Gilead now requests in a petition for a writ of certiorari that the U.S. Supreme Court rule on the following question:

Whether an FCA allegation fails when the Government continued to approve and pay for products after learning of alleged regulatory infractions and the pleadings offer no basis for overcoming the strong inference of immateriality that arises from the Government’s response.

Gilead provides several reasons the Court should grant the writ. First, the Ninth Circuit’s approach conflicts with the decisions of six circuits that have addressed this very question and interpreted Escobar differently.  Second, courts have had, and will have, to consider this question with frequency, and the outcome of this case could impact the availability of drugs and medical products to the marketplace.  Last, this case is well positioned to provide “guidance on a significant and recurring issue by clarifying how the Government’s response upon learning of alleged infractions affects the viability of an FCA complaint.”

Response to the petition is due on February 2, 2018.

By Anne K. Walsh & Andrew J. Hull —

Hyman, Phelps & McNamara, P.C. is pleased to present this report summarizing leading cases and settlements from 2017 affecting the FDA-regulated industry. Our goal was to provide a concise summary of issues that most impact our clients, many of whom are drug and medical device manufacturers, compounding facilities, and officers of those companies.

For each case or settlement, we summarize the facts and the key takeaways. And we include at the end of the report the hot-button issues that we are monitoring in 2018.

We hope this report proves useful and interesting to you.

By Jennifer M. Thomas —

FDA gave us all a New Year’s present on January 2nd when it announced the Agency’s new Data Dashboard. The Dashboard graphically breaks down data on FDA Inspections, Compliance Actions (warning letters, injunctions, and seizures – more commonly known by industry as “enforcement actions”), Recalls, and Imports/Import Refusals, by fiscal year (starting with 2009), product category (drugs, devices, food, cosmetics, etc.), and in other helpful ways depending on the data set.  For example, in addition to filtering by fiscal year and product category, inspection data can also be filtered by the inspection classification (NAI, VAI, or OAI), region (foreign or domestic), country, state, or even company name.

Compliance actions can be filtered by the type of action, firm name, region, state, and country. Each Dashboard page features a map that pinpoints the geographic location of subject facilities, and by using the map’s “lasso” function you can select and see data from a custom geographic region.

Of course, the Data Dashboard does not provide any information that is not already publicly available through FDA’s website. And it does not offer specifics about the subject of FDA compliance actions, inspectional observations, or import refusals.  For these specifics, users may find more detailed information in FDA’s preexisting Inspection Classification Database (updated monthly as of November 2017), Electronic Reading Room – Warning Letters, or ORA FOIA Electronic Reading Room.

Importantly, the new Data Dashboard is limited in that “[t]he datasets are updated semi-annually and only include final actions,” and FDA has not indicated when the next semi-annual update will occur. Given that some inspections and compliance actions are not considered “final” for months or even years, the Data Dashboard may not be the best place to look if you are hoping to find companies or products that have been the subject of recent FDA action.  However, if you want to quickly identify and analyze longer-term trends, find general information on FDA activities relating to a certain product category, country, geographic region, or a certain company, the Dashboard makes existing FDA data significantly more accessible and useful – a welcome start to the New Year.

By Ricardo Carvajal & JP Ellison & John A. Gilbert —

Press wires are abuzz this morning with reports that U.S Attorney General Jeff Sessions will rescind an August 2013 Memorandum issued by then Deputy Attorney General James Cole, regarding marijuana-related enforcement activities by federal prosecutors.  The official announcement is expected later today, and we’ll be reading it closely.

Just yesterday, published reports indicated that marijuana activities accounted for $16 billion in economic output in 2017, with a projected $40 billion in 2021.  We expect that those projections may be undergoing revision.

In this time of uncertainty, understanding the law, policies, practices and state and federal enforcement and regulatory priorities will be critical.  Whether you have already made investments or other commitments based on state law developments and prior federal policies, or are considering a how to respond to the present fluid regulatory landscape, a nuanced understanding of what is happening and where things may go is critical.  Through our postings and otherwise, we plan to stay on top of these developments.

By Serra J. Schlanger & Alan M. Kirschenbaum —

On December 20, 2017, the Department of Health and Human Services, Office of Inspector General (OIG) published a report entitled “Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion in Lost Medicaid Rebates.” This report is the result of Congress’ September 2016 request for OIG to “evaluate the accuracy of manufacturer-reported drug classification data in the Medicaid rebate program, and the extent to which [the Centers for Medicare and Medicaid Services] CMS oversees drug classification data submitted by manufacturers.”

In order to be eligible for Federal payments for their covered outpatient drugs under Medicaid and Medicare Part B, drug manufacturers must enter into rebate agreements and pay quarterly rebates to the States. As part of these agreements, drug manufacturers must provide CMS with their average manufacturer price (AMP) and best price, if applicable, for each covered outpatient drug. Drug manufacturers must also report and certify certain data about each drug, including its “drug category” – i.e., whether the drug is an innovator (generally brand-name) or noninnovator (generic) product – in the Drug Data Reporting for Medicaid System. CMS uses the price and drug category data to calculate the applicable rebate amounts for each drug on a quarterly basis. States then use this to invoice manufacturers for the rebates owed for these drugs. The minimum rebate for innovator drugs is 23.1% of the AMP, while the minimum rebate for noninnovator drugs is only 13% of the AMP.

To conduct its review, OIG compared the drug classification data in the Medicaid System to FDA’s marketing categories for over 30,450 drug products. OIG found that 95% of the drugs in the Medicaid rebate program were appropriately classified. These drugs account for 98% of the $59.7 billion in Medicaid reimbursement in 2016 for the reviewed products. OIG also determined that approximately 3% of drugs were potentially misclassified in 2016; reimbursement for the potentially misclassified drugs totaled $813 million in 2016. OIG found that the majority of the potentially misclassified drugs (97%) were identified as noninnovator products in the Medicaid System but as innovator products in FDA’s data. This discrepancy means that manufacturers may have paid a lower base rebate amount and may not have paid applicable inflation-adjusted rebates for these products in 2016. OIG then took a closer look at the ten potentially misclassified drugs with the highest total Medicaid reimbursement in 2016. All ten drugs were classified as noninnovator products in the Medicaid System but as innovator products in the FDA data. OIG calculated that the manufacturers for these drugs may have owed an additional $1.3 billion in Medicaid rebates from 2012 to 2016. Notably, two drugs accounted for 90% of the potentially lost rebates.

OIG recommended that CMS pursue a means to compel manufacturers to correct inaccurate classification data reported to the Medicaid System; however, CMS indicated that it does not currently have the legal authority to compel such corrections. In response to OIG’s recommendation, CMS stated that it will consider how to improve agency efforts to compel manufacturer corrections. CMS also stated that it shares a joint responsibility with OIG to oversee manufacturers’ compliance with data reporting, and encouraged OIG to use its enforcement authority in this area. OIG confirmed that it has authority to pursue civil monetary penalties against manufacturers for certain violations of the Medicaid rebate statute. However, OIG stated that “it lacks legal authority to affirmatively pursue penalties for the submission of inaccurate drug classification data.” The report does not mention that the Federal False Claims Act (FCA) has been used in several instances to target the knowing submission of false drug category data.

OIG plans to provide CMS with lists of the drugs identified as potentially misclassified, the drugs that were missing from FDA files, and the drugs for which OIG could not determine an appropriate classification. As the Federal government and state Medicaid programs continue to focus on drug expenditures, we may see CMS and OIG take a more active role in requesting updated drug classification information from manufacturers. In fact, since 2016, CMS has increased its efforts to identify instances where the drug category reported by a manufacturer conflicts with its FDA manufacturing application type. At a minimum, we expect that the manufacturers of the 885 drugs that OIG identified as potentially misclassified will receive a follow-up inquiry from CMS, unless they applied for a “special exception” from the definition of an innovator drug by March 31, 2017. We can also expect to see the Department of Justice and whistleblowers continue to use the FCA to challenge the knowing submission of false drug category data.

By Rachel E. Hunt & Allyson B. Mullen —

On December 5, 2017, FDA issued a final guidance: Technical Considerations for Additive Manufactured Medical Devices, Guidance for Industry and Food and Drug Administration Staff. Additive Manufacturing (AM) is “a process that builds an object by iteratively building 2-dimensional (2D) layers and joining each to the layer below, allowing device manufacturers to rapidly alter designs without the need for retooling and to create complex devices built as a single piece.”  This includes so‑called 3D printing.  FDA issued a draft of this guidance in May 2016, as discussed in our prior blog post here. This post discusses the main differences between the draft and final guidance.  For a more in depth overview of the entire content, please refer to the prior blog post.

The guidance provides insight into the unique considerations of AM manufacturers in complying with quality system regulations and device testing considerations (i.e., premarket submission considerations). FDA Commissioner Scott Gottlieb, M.D. issued a statement concurrently with release of the guidance, highlighting that, with this guidance, the “agency is the first in the world to provide a comprehensive technical framework to advise manufacturers creating medical products on 3D printers.” Commissioner Gottlieb also stated that the intention of the guidance is to “help manufacturers bring their innovations to market more efficiently by providing a transparent process for future submissions and making sure our regulatory approach is properly tailored to the unique opportunities and challenges posed by this promising new technology.”

As with the draft, this guidance notes that it is a leapfrog guidance, where the Agency can share initial thoughts regarding emerging technologies that are likely to be of public health importance early in the product development. The Agency notes that the recommendations contained in this guidance may change as more information becomes available.

Noteworthy Changes from the Draft Guidance

The final guidance contains some changes from the draft that are worth highlighting. One of the most notable changes was the inclusion of additional issues in the section regarding Patient-Matched Device (PMD) Designs.  These are products that are matched to a patient’s anatomy.  The finalized guidance includes a section on complex design files and files and cybersecurity and personal identifying information not found in the draft.

Complex Design Files

The guidance notes that PMDs that follow the patient’s anatomy are vulnerable to errors in file conversion because they involve complex anatomic curves that can create difficulties when calculating conversions. The guidance recommends that manufacturers of PMDs follow considerations on maintaining data integrity throughout file conversions.

Cybersecurity and Personal Identifying Information

The guidance does not go into detail on the cybersecurity implications of PMDs, noting that the topic is beyond the scope of the guidance. Instead, the document refers readers to the HHS Guidance on Significant Aspects of the Privacy Rule and Content of Premarket Submissions for Management of Cybersecurity in Medical Devices.

Risk-Based Approach to Imaging Data

Other notable changes specific to PMDs are that manufacturers should be employing a risk-based approach when incorporating imaging data into the final design. The guidance advises manufacturers to take into consideration the intended use of the device and the design methodologies to assess the scenarios that may yield a worst-case match.

Test Coupons

A final notable addition involves the use of test coupons in AM devices. A test coupon is a representative test sample of a device or component.  The draft guidance noted the importance in the design of test coupons and placement within the build volume in the context of AM and recommended the use of coupons to help with process validation and for in-process monitoring.  The final guidance clarifies that test coupons may not be needed if the process is validated per QSR requirements and coupon testing is not a process monitoring activity defined in your quality system.

Because of the nature of this technology and the fact its clinical applications are relatively new to the Agency, we recommend that manufacturers of AM devices seek feedback from FDA on their specific device early in the submission planning process.

Additional Thoughts

The final guidance fails to provide any insight into decision-making on whether or not to file a new 510(k) for modifications to a device or the manufacturing process of an AM device, a major issued we identified in our discussion of the draft guidance. Additionally, the final guidance does not address who FDA considers to be an AM device manufacturer, generally referring to manufacturers without specifically defining what that label encompasses.  This is important because there are many entities that would not be considered manufacturers in the traditional sense, but could arguably be considered AM manufacturers.  For example, if a hospital obtains a 3D printer and creates a device (based on cleared specifications) specific to a patient’s anatomy, does that act make it a manufacturer subject to these requirements?  The answer is not clear.  Notably, however, Commissioner Gottlieb acknowledged in his statement that more insight from the Agency in needed on the topic of who is an AM manufacturer: “Developing a transparent policy on 3D printing remains an important next step for us, and we plan to explore the role of nontraditional manufacturing facilities like a hospital operating room or university laboratory.”  Hopefully the Agency will provide more clarity on this topic soon.