Understanding the Use of Misdemeanors in Healthcare Enforcement

Health Law Alert Newsletter

2012: Issue 3

By: Virginia B. Evans* and John S. Linehan*

Copyright 2012 American Health Lawyers Association, Washington, DC
Reprint permission granted.

As reflected in recent headlines and statistics, the federal government has made the fight against healthcare fraud an enforcement priority. Equipped with a barrage of legal tools and resources, and buoyed by broad popular and political support, healthcare prosecutions have reached an unprecedented scale and frequency. For fiscal year 2011, the number of healthcare prosecutions was projected to reach 1,355, an increase of 85.4% over fiscal year 2010 and 157% over five years ago.1

A notable feature of the government's new prosecution strategy is its increased reliance upon criminal misdemeanor convictions to further enforcement goals. While a misdemeanor plea may be an ideal resolution in many white collar scenarios, such a result could lead to devastating consequences in the healthcare context. This article describes the use of misdemeanor prosecutions in federal healthcare enforcement, surveys collateral consequences, and provides suggestions for waging an optimal defense.

Crimes and Misdemeanors: Salient Trends in Healthcare Enforcement

To bolster its campaign against healthcare fraud, the federal government has revamped its enforcement approach through innovative tactics and initiatives. In this process, the government increasingly has focused on: (1) the coordination of agency efforts and resources; (2) the targeting of individuals as well as entities; and (3) the pursuit of misdemeanor prosecutions.

To amass scale and leverage in healthcare proceedings, several govern­ment agencies now coordinate their administrative and enforcement activities through multi-agency working groups like the Health Care Fraud Prevention and Enforcement Action Team (HEAT) and the Medicare Strike Force. Even in cases that ostensibly involve only Department of Justice attorneys and criminal allegations, it is more than likely that state attorneys general offices, licensing boards, hospital authorities, health insurance plans, the Department of Health and Human Services (HHS) Office of Inspector General (OIG), and the U.S. Food and Drug Administration (FDA) are in the background. In fact, in certain extreme cases, even individuals who are not charged or named in a settlement may be subsequently targeted. To cite a recent example, the OIG initiated exclusion proceedings against Howard Solomon, the chairman, chief executive officer, and president of Forest Laboratories, months after the company entered into a settlement agreement, despite the fact that Mr. Solomon was not charged in the underlying criminal suit.2

The scope of enforcement actions also has expanded, as individual providers and executives in the healthcare industry increasingly find themselves in the government's crosshairs. Historically, healthcare companies were the main targets in criminal and civil actions. While these cases often resolved in misdemeanor convictions, large monetary fines, and corporate integrity agreements (CIAs), the government generally resisted imposing felony convictions and exclusions against large corporations whenever possible to avoid major economic disruption and the deprivation of needed medical goods and services. In recent years, however, the government has begun to reexamine its enforcement approach, driven the by concerns that the status quo has failed to achieve sufficient industry deterrence. Unless individuals are placed on the hook, it is argued, corporations can proceed unabated by absorbing enforcement penalties as a cost of doing business.3

Recent events suggest that to deter corporate misbehavior, the government will target individuals with misdemeanor prosecutions that can then be parlayed to drastic punitive effect. The FDA has been an especially prominent champion of this approach, as it announced in its Regulatory Procedures Manual that "[m]isdemeanor prosecutions, particularly those against responsible corporate officials, can have a strong deterrent effect on the defendants and other regulated entities."4 Similarly, in a March 2010 letter to Congress, FDA Commissioner Margaret Hamburg announced that the agency was taking steps "to increase the appropriate use of misdemeanor prosecutions, a valuable enforcement tool to hold responsible corporate officials accountable."5 Pursuant to the "responsible corporate officer" theory, alternately known as the Park Doctrine,6 executives of FDA-regulated companies may be held strictly liable for misdemeanor offenses under the federal Food, Drug, and Cosmetic Act (FDCA) even where the executive had no role in, or awareness of, the underlying regulatory violation. Industry observers have discovered that these are not hollow pronouncements. Responsible corporate officer­based prosecutions have resulted in the misdemeanor convictions of three leading executives of Purdue Pharma in 2007, and four former executives of Synthes in 2009.7

As a result, misdemeanor prosecutions of individuals have become prominent phenomena in healthcare enforcement, particularly in the pharmaceutical context. In the distant past or in different settings, this would not be a cause for major concern as misdemeanors typically invited small fines or limited probationary sentences. However, in today's environment, such violations may translate to prison time, significant probation, exclusion from federal healthcare programs, FDA debarment, and professional license revocation — harsh consequences traditionally associated with felonies.

The Collateral Consequences of Misdemeanor Convictions in the Healthcare Sector

Central to a white collar defense attorney's representation is an assessment of the collateral consequences of a guilty plea that may relate to sentencing, business decision making, shareholder derivative actions, and Directors and Officers (D&O) insurance policies. These factors apply with equal force in the healthcare context. For instance, recognition must be paid to the recent U.S. Sentencing Guideline amendments that provide for multiple level enhancements for healthcare fraud offenses involving losses exceeding $1 million.8 Furthermore, defense counsel must investigate additional collateral factors that are unique to the healthcare setting, including, among other things, loss of professional licensure, exclusion from federal programs, and FDA debarment. In light of recent enforcement practices, this investigation must include careful consideration of whether, and to what extent, such collateral consequences may be implicated by misdemeanor convictions.

Professional Licensure Issues

Individual healthcare providers facing criminal charges should be concerned first and foremost with how a conviction may impact the status of a medical license. In 2010, the Federation of State Medical Boards recorded a total of 1,815 losses of license or privileges and the imposition of 1,296 license restrictions, such as probation.9 While the bulk of these administrative sanctions are based upon negligence and deviations from applicable standards of care, they also frequently spring from other forms of misconduct including criminal convictions.

Healthcare professional licensure matters are governed by state law and the rules of the applicable professional licensing board. While in some states physicians may only be disciplined for misconduct relating to the practice of medicine, in other states physician licenses may be jeopardized by certain activities unrelated to medicine that nevertheless demonstrate "moral turpitude." As a general matter, adjudications of guilt, whether received in the local jurisdiction, or in a foreign state, must be timely reported by the provider to the relevant professional licensing board and sometimes as well as to the National Practitioner Data Base. In many states, a plea of nolo contendere is treated as the equivalent of a guilty plea for licensure purposes, and can be conclusive evidence of unprofessional conduct. Likewise, many states treat deferred or withheld adjudications as equivalent to findings of guilt.

Offenses associated with healthcare fraud tend to invite more drastic sanctions than other offenses. During settlement negotiations, it is critical that defense counsel advocates for the particular offense that best promotes the defendant's chances for avoiding loss of licensure. Offense selection is particularly important when facing misdemeanor charges because similar misdemeanors can vary greatly with respect to their effect in subsequent licensure proceedings.

OIG Exclusion from Federal Healthcare Programs

Pursuant to Section 1128 of the Social Security Act (Act), the OIG is authorized to exclude provider entities and individuals from Medicare, Medicaid, and other federal healthcare programs. The OIG's exclusion powers are defined by both the mandatory and permissive provisions of Section 1128. The mandatory provisions require five-year minimum periods of exclusion for providers receiving felony convictions relating to healthcare fraud or controlled substances, or felony or misdemeanor convictions for program-related crimes or patient neglect or abuse.10 The permissive provisions grant the OIG discretion in determining whether to exclude providers for a wide range of misconduct.11 Some of the permissive bases are open-ended or subjective in nature, such as the prohibitions on "fraud, kickbacks, and other prohibited activities,"12 the "failure to grant immediate access," and the "failure to take corrective action."13

The OIG's exclusion authority has been broadly construed and may apply to a wide range of misconduct. For instance, a "conviction" is said to exist for purposes of exclusion where: (a) an offender has received a judgment of conviction, regardless of whether an appeal is pending or the record has been expunged; (b) a finding of guilty is made against the individual or entity by a federal, state, or local court; (c) a plea of guilty or nolo contendere has been received by a court; or (d) the offender has entered into a "first offender, deferred adjudication or other arrangement where judgment of conviction is withheld."14 In addition, the statutory terms "related" and "relating to" referenced in the mandatory exclusion provisions of Sections 1128(a), (1)-(4) and in the permissive provisions of Sections 1128(b), (1)-(3), have been broadly interpreted by the HHS Departmental Appeals Board (Board). For instance, misconduct is deemed to be "related" to a federal health program whenever a basic "nexus or a common-sense connection" can be drawn between the misconduct and the program.15

Excluded providers, as well as anybody that employs or contracts with excluded providers, are barred from billing the government for items or services furnished to patients. Violations of these rules can lead to significant civil monetary penalties and damages. Moreover, given the vital importance of federal funding, exclusion is generally referred to as "the death penalty," as it frequently leads to the elimination of a provider's business.

Due to their enormous breadth and bite, the OIG's exclusion powers are justifiably considered to be among the government's most powerful weapons in policing misconduct in the healthcare sector. Therefore, it is surprising to consider the relative ease with which the exclusion sanction may be triggered. Indeed, as noted above, the OIG is compelled to exclude an individual for at least five years upon that individual's acceptance of a misdemeanor plea to a "program-related" offense, as it is broadly defined. Similarly, minimum three-year exclusions may be imposed for misdemeanors "relating to" healthcare fraud and controlled substances, or for fraud in non-healthcare programs or the obstruction of investigations. The close connection between misdemeanors and career-ending exclusion is all the more troubling considering the government's penchant for employing the "responsible corporate officer" doctrine to find corporate executives strictly liable for misdemeanors in the pharmaceutical setting.

Finally, and perhaps most alarmingly, individuals may be excluded even where they received no conviction or had no personal knowledge of an underlying offense or its relationship to a health program. Section 1128(b)(15) of the Act authorizes the OIG to exclude officers and managing employees of entities that have been excluded or convicted of certain healthcare offenses. In guidance issued in October of 2010, the OIG stated that it would apply a presumption in favor of exclusion where the managing employee knew or should have known of the prohibited conduct.16 In the absence of any such knowledge on behalf of the managing employee, the OIG's determination of whether to apply exclusion will include consideration of four categories of factors, including: (1) the nature and scope of the misconduct; (2) the individual's role in the sanctioned entity; (3) the individual's actions in response to the misconduct; and (4) information about the entity. The OIG affirmed its use of Section 1128(b)(15) in its high-profile exclusion of Marc S. Hermelin, the chairman of the board of K-V Pharmaceutical Co. At the time of his exclusion in November 2010, Mr. Hermelin had not been convicted of a crime; instead, his exclusion was derivatively based upon K-V Pharmaceutical's entry into a civil consent decree and its subsidiary's receipt of felony convictions under the FDCA.17 Despite the controversy generated by the OIG's pursuit of exclusion based upon the responsible corporate officer doctrine and Section 1128(b)(15), events suggest that these sanctioning practices are becoming commonplace.

FDA Debarment from the Drug Industry

The FDA is empowered by statute to "debar" — or ban from the drug industry — individuals and entities convicted of certain offenses relating to drug products. The mandatory provisions direct the FDA to debar an individual who has received a felony conviction for misconduct relating to the development, approval, or regulation of a drug product.18 Under its permissive authority, the FDA has discretion to debar an individual for up to five years for receiving a federal misdemeanor or state felony conviction for conduct relating to the development, approval, or regulation of drug products, or if such individual has been convicted of a felony unrelated to regulation of drugs that involves certain crimes, including, bribery, extortion, fraud, perjury, falsification, and destruction of records, or the obstruction of an investigation.19 In determining the appropriateness of a debarment period, the FDA may consider: (a) the nature and seriousness of the offense; (b) the nature and extent of management participation in the event; (c) the nature and extent of any voluntary steps to mitigate the public impact of the offense; (d) whether the extent to which changes in ownership, management, or operations have corrected the causes of any offense involved; (e) whether the targeted individual is able to show that the relevant drug applications are free of fraud or material false statements; and (f) any prior convictions involving matters within the FDA's jurisdiction.20

Debarred individuals are prohibited from working in any capacity for a company that has an approved or pending drug product application with the FDA. To promote compliance, applicants seeking approval for drug products are required to certify that they have not employed the services of any debarred individuals. Debarred companies are prohibited from submitting, or assisting others in submitting, future drug product applications. Any violations of these rules can serve as a basis for the imposition of civil monetary penalties. Thus, much like exclusion, FDA debarment can have devastating consequences for employees and companies working in the pharmaceutical industry.

In recent years, the FDA has indicated that it is assuming a more muscular approach in its enforcement activities. This shift may be inspired in part by criticism that the agency received in the wake of a 2009 Government Accountability Office report, which found the FDA's debarment and related disqualification procedures were unnecessarily limited and time consuming.21 Since this report, the agency has implemented reforms that have served to dramatically increase the quantity, efficiency, and transparency of its debarment actions. Mirroring the efforts of the OIG with respect to exclusion, it is foreseeable the FDA will increasingly seek permissive debarment on the basis of qualifying misdemeanors.

Managing the Crisis: Prophylactic Measures, Informed Decision Making, and Global Settlements

The government's aggressive pursuit of misdemeanors in the healthcare context presents defense counsel with enormous obstacles. To begin with, through the responsible corporate officer doctrine and derivatively based exclusion, the government is sometimes able to obtain drastic sanctions without having to establish mens rea or causation. Moreover, defense counsel's ability to mitigate the consequences of a criminal conviction is hamstrung by the legal fiction — promoted by the government and accepted by courts — that license revocation, exclusion, and debarment are not forms of punishment, but instead remedial sanctions designed to protect the public from unlawful misconduct. As a result, healthcare professionals who are unfortunate enough to be ensnared in enforcement proceedings are vulnerable to career-ending consequences in the event that they receive a misdemeanor conviction.

Due to the government's enormous leverage in this context, the best defense strategies are prophylactic. The implementation and operation of a rigorous compliance program is a healthcare company's best opportunity to forestall problems before they arise. Adequate attention and resources should be paid to ensure that such programs include the most up-to-date mechanisms and internal controls for proper reporting, awareness, and compliance.

Once enforcement proceedings are underway, defense counsel must properly advise the client of the wide range of potential downstream consequences tied to pleading decisions. While many healthcare professionals may already comprehend the gravity of debarment, loss of license, or exclusion, they may not be aware of how these sanctions may flow from misdemeanor infractions. In addition, potential collateral consequences should also inform the client's business decisions. For instance, in cases where the government's case is particularly strong, and exclusion, disbarment, and loss of licensure are unavoidable, it may be prudent for a client to sell his or her practice or ownership interest before a final judgment decreases its value.

During settlement negotiations, defense counsel should seek a global agreement that addresses all government actors and potential loose ends to best minimize adverse collateral consequences and the likelihood of unwelcome surprises. For corporate defendants, such resolutions will frequently include entry into a CIA. Likewise, it is normally advantageous for individual and corporate defendants to enter into Deferred Prosecution Agreements (DPAs), whereby the provider agrees to probationary conditions in lieu of criminal conviction. CIAs and DPAs are beneficial because they do not constitute "convictions" that may serve as a basis for automatic exclusion. Finally, in the event that a criminal conviction is unavoidable, counsel should advocate for the application of select misdemeanors that are less likely to implicate grievous administrative sanctions.

* Virginia B. Evans is formerly of Ober|Kaler's Government Investigations and White Collar Defense Group and Health Law Group.


1 Transactional Records Access Clearinghouse (TRAC), Health Care Fraud Prosecutions for 2011, Aug. 17, 2011.

2 See Alicia Mundy, U.S. Drops Effort to Oust Forest Labs CEO, Wall St. J., Aug. 6, 2011 (noting that Mr. Solomon had been targeted for exclusion despite not being personally accused of any wrongdoing but that the exclusion action was eventually dropped).

3 See Ed Silverman, The OIG and Excluding Execs: Demske Explains, Pharmalot.com, June 6, 2011, available at:www.pharmalot.com/2011/06/ the-oig-and-excluding-execs-demske-explains/ (in an interview with Pharmalot.com, Gregory Demske, the OIG's assistant inspector general for legal affairs, stated: "Our concern is the pattern over the last 10 years doesn't indicate that forcing companies to pay money has really changed behavior.").

4 FDA Regulatory Procedures Manual § 6-5-3 (Mar. 2010) available at: www.fda.gov/ICECI/ComplianceManuals/RegulatoryProceduresManual/ ucm176738.htm (last visited October 31, 2011).

5 Letter from Margaret Hamburg, FDA Commissioner, to The Honorable Chuck Grassley, ranking member of the Senate Finance Committee (Mar. 4, 2010), available at: www.grassley.senate.gov/about/loader. cfm?csModule=security/getfile&pageid=25529.

6 The decision of the U.S. Supreme Court in United States v. Park, 421 U.S. 658 (1975), is viewed as the seminal case upholding the propriety of the responsible corporate officer doctrine.

7 See Vanessa O'Connell & Michael Rothfeld, U.S. Targets Drug Executives: Law Allows Courts to Hold Corporate Officials Responsible for Pharma Violations, Wall St. J., Sept. 13, 2011.

8 See U.S. Sentencing Commission, Amendments to the Sentencing Guidelines (Apr. 28, 2011), available at: www.ussc.gov/Legal/Amendments/ Reader Friendly/20110428_RF_Amendments_Final.pdf.

9 Federation of State Medical Boards, Summary of 2010 Board Actions, available at: www.fsmb.org/pdf/2010-summary-of-board-actions.pdf.

10 42 U.S.C. §§ 1320a-7(a), (1) – (4).

11 Id. at §§ 1320a-7(b), (1) – (15).

12 Id. at § 1320a-7(b)(7).

13 Id. at §§ 1320a-7(b)(12) and 1320a-7(b)(13).

14 Id. at § 1320a-7(i).

15 See, e.g., Scott D. Augustine, DAB No. 2043 (2006); Timothy Wayne Hensley, DAB No. 2044 (2006); Neil R. Hirsch, M.D., DAB NO. 1550 (1995).

16 See OIG, Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act (Oct. 20, 2010), available at: http://oig.hhs.gov/exclusions/files/permissive_excl_ under_1128b15_10192010.pdf.

17 Jim Doyle, KV's Hermelin Is Banned From Federal Health Care Programs, Stltoday.com, Nov. 17, 2010, available at: www.stltoday.com/business/ article_f51abe32-a767-5f3b-bf55-4978db665cab.html.

18 21 U.S.C. § 335a(a).

19 Id. at § 335a(b).

20 Id. at § 335a(c).

21 See U.S. Government Accountability Office, Oversight of Clinical Investigators: Action Needed to Improve Timeliness and Enhance Scope of FDA's Debarment and Disqualification Processes for Medical Product Investigators (Sept. 2009), available at: www.gao.gov/new.items/d09807.pdf.



 * Virginia B. Evans is formerly of Ober|Kaler's Government Investigations and White Collar Defense Group and Health Law Group.

John S. Linehan is formerly of Ober|Kaler's Health Law Group.