“Free Services” and False Claims Act

When does a “free service” violate the False Claims Act?

A recent Pennsylvania case involving Medtronic plc put some parameters around that question.

In a whistleblower suit filed by a Medtronic district manager, the company was accused of offering surgical support and other free services as kickbacks to induce surgeons and hospitals into buying the company’s implants. The whistleblower, who worked for the company’s cardiovascular group, alleged that the company pulled in clients by providing free surgical support, implant device follow-up, and free staff to clinics that purchased their medical devices.

Permissible Services and Illegal Intent

U.S. Federal District Judge Edward Smith ruled on June 19, 2017 that Medtronic is allowed under federal law to provide support services that are “specifically tied to support of the purchased product” so long as they don’t exceed ““substantial independent value to the purchaser.”

Smith, according to Law360, said a whistleblower, “must describe with sufficient specificity how Medtronic’s free services crossed the line separating permissible product support from illegal remuneration with independent value to the purchaser. [The accuser] must also demonstrate that any independent value to the purchaser was substantial.”

Law360 reported on June 20 that while the whistleblower alleged that Medtronic touted its free services and that it used these services to pull in new clients, Judge Smith agreed with Medtronic’s argument that the relator showed no evidence that the services provided by the medical device maker were motivated by an illegal intent.

“While [the whistleblower] alleges that the effect of the scheme was to induce physicians to refer Medtronic’s products to their patients, [the whistleblower] has not alleged that its subjective purpose was to do so,” Judge Smith said.

No Medicare/Medicaid Violation

The whistleblower, according to the report, also failed to tie the alleged kickbacks to false claims through Medicare or Medicaid, Judge Smith ruled. The whistleblower alleged that Medtronic’s customers billed the federal insurance programs and submitted a sample list of customers receiving Medtronic’s free services, causing them to “submit false claims for reimbursement.”

“These conclusory allegations that the providers to whom Medtronic provided free services generally submitted claims to the government do not suffice, and the mere fact that Medtronic did, in fact, provide free services to particular doctors on particular dates does not amount to reliable indicia leading to a strong inference that the providers subsequently submitted claims to Medicare or Medicaid,” Judge Smith wrote.

Finally, Judge Smith rejected all alleged violations of state laws, pointing out that all of the complaint’s alleged wrongdoing happened in Pennsylvania, which has not enacted false claims legislation, and that whistleblower’s assessment that Medtronic engaged in “nationwide marketing” is not enough to warrant her state claims.

The complaint “does not specify any customers of Medtronic outside the state of Pennsylvania, nor do the factual allegations contained in the amended complaint mention the names of any states aside from Pennsylvania,” he said in the ruling.

The case is United States of America et al. v. Medtronic Inc., case number 5:15-cv-06264, in the U.S. District Court for the Eastern District of Pennsylvania.