Medicaid Fraud Claim Belongs in State Court

Although relators in this qui tam action under Virginia law are appealing their assigned share of the settlement proceeds in their suit against medical laboratories for allegedly submitting false Medicaid claims in Virginia, the 4th Circuit vacates the settlement because the district court did not have subject matter jurisdiction; the mere fact that the Virginia Medicaid program is jointly funded by the federal government and the commonwealth does not meet a test for federal jurisdiction.

State claim

Under Virginia law, a relator may in­stitute a qui tam civil action alleging vi­olations of the Virginia Fraud Against Taxpayers Act, Va. Code § 8.01-216.5(A). On Dec. 19, 2007, the relators filed the qui tam complaint in this case under seal in Fairfax County Circuit Court. The com­plaint alleged the defendant medical lab­oratories violated the VFATA by present­ing false claims, in contravention of Va. Code § 8.01-216.3(A)(1); and by making or using false records or statements to ob­tain payment or approval of false claims, in violation of Code § 8.01-216.3(A)(2). The complaint sought damages, civil pen­alties, costs and other appropriate relief under Virginia law.

The complaint alleged defendants false­ly represented that the fees being charged were no greater than the maximum fees payable pursuant to Virginia regulations. Relators alleged that the various defen­dants offered deep discounts for certain services to “induce” physicians, hospitals and other healthcare providers to rely on one of defendants’ facilities for most or all of their testing needs. The relation­ships thereby established would gener­ate “pull through” referrals of testing for patients covered by Medicaid, for which defendants would substantially overbill the Virginia Department of Medical As­sistance Services when submitting reim­bursement claims. The complaint further alleged these “pull through” practices were independently unlawful as kickback schemes prohibited by federal health care programs. Relators did not, however, seek relief predicated on violations of federal law.

Relators did not challenge defendants’ removal of the action to federal court, based on defendants’ theory that the com­plaint alleged a federal “pull through” theory of liability that hinged entirely on the interpretation and application of fed­eral law.

In May 2014, the district court dis­missed with prejudice claims against sev­eral defendants and four remaining de­fendants agreed to settle claims against them by paying $1.25 million to the com­monwealth, which would then pay rela­tors a percentage of the settlement pro­ceeds. The settlement agreement stated that venue for resolving disputes related to the agreement would be in Virginia state courts. The district court rejected re­lators’ request for $350,000 and approved the commonwealth’s proposal to award relators $138,925.34 as their share.

Jurisdictional issue

Applying the well-pleaded complaint rule here demonstrates that, without question, federal law does not create any cause of action that is asserted in the complaint. Relators’ VFATA claims fail because those claims do not necessarily raise any federal issue. To prove the “pull through” theory – defendants’ basis for removal to federal court – relators need only show that defendants contravened the commonwealth’s Medicaid regula­tions; namely by undercharging for cer­tain services in order to induce Medicaid referrals, and then overcharging the com­monwealth when providing those same services to referred Medicaid recipients. The corresponding Medicaid reimburse­ment claims defendants submitted to DMAS were false, according to relators, because charging Medicaid recipients higher fees than other clients violated DMAS regulations.

The mere fact that the Virginia Medic­aid program is jointly funded by the fed­eral government and the commonwealth is not sufficient to meet a test for jurisdic­tion, and that fact does not make a federal case out of every Medicaid dispute.

Vacated and remanded.

Commonwealth of Va., ex rel. Hunt­er Laboratories LLC v. Commonwealth of Va. and Laboratory Corp. of America (King) No. 15-1484, July 7, 2016; USDC at Alexandria, Va. (Lee) Eric J. Buescher for appellants; Candice M. Deisher, AG Office, for appellee. VLW 016-2-118, 17 pp.