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.
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.
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.