It is often instructive to revisit old cases that have become so well-known for a doctrine that the underlying facts are often forgotten. I did this recently while reading the original care mark and Stone vs. Ritter the decisions. The first decision was published in 1996 and the second, a decade later in 2006. They both made for interesting reading and the underlying facts could well be gleaned from the stock headlines. anti-corruption and anti-money laundering (AML) law enforcement today. the original care mark This decision laid the foundation for modern board obligations to oversee compliance in general and a company’s risk management profile in particular. Stone vs. Ritter confirmed the continued vitality of the originalcare mark decision. Today, in Part 1, we review the underlying facts of the care mark decision and in Part II, the legal reasoning.
Underlying facts
In care mark, the decision involved a company that provided patient care and managed care services and a substantial portion of the revenue generated by the company came from third-party payments, insurers and Medicare and Medicaid reimbursement programs. Medicare and Medicaid payments were governed by the Anti-Referral Payments Act (“ARPL”) which prohibited health care providers (HCPs) from paying any form of compensation (i.e. bribes- de-vin) to physicians to encourage them to refer Medicare or Medicaid patients to Caremark products or services.
In an attempt to circumvent this requirement, Caremark entered into various service contracts (for example, consulting agreements and research grants) with physicians, at least some of whom prescribed or recommended services or products that Caremark provided to Medicare beneficiaries. and to other patients. In addition, Caremark had a decentralized governance and operational structure that gave business units wide latitude to enter into such agreements without compliance or centralized or corporate legal oversight. The results were pretty much what you expected.
Several federal investigations revealed that from the mid-1980s to the early 1990s, Caremark paid doctors millions in disguised forms to evade liability from the ARPL. Caremark asserted that its payments for consulting, teaching, research grants and other similar evasions did not violate the law. In addition, it relied on an audit performed by Price Waterhouse (PwC) which concluded that there were no material weaknesses in Caremark’s control structure.
In 1993, Caremark formally changed its compliance manual to prohibit such payments, announced this change internally, and conducted training for this new set of policies. However, no control, monitoring or follow-up was noted. Indeed, it’s unclear if anything has changed at Caremark, given the decentralized nature of its business model.
Criminal and civil charges
In August 1994, Caremark was hit with a 47-page indictment alleging criminal violations of the ARPL, including payments to induce physicians to refer patients to Caremark services and products. The indictment alleged that the payments were “under the guise of research grants and others were consulting agreements.” Further, the Indictment goes on to allege that these payments were made when no consulting or research services were being performed. (Very 2022 FCPA-ish) A doctor reportedly received direct payments from Caremark for staff and office costs. Several shareholder lawsuits have been filed against the board in Delaware and another federal indictment has been processed in Ohio. In addition to claims in Ohio, new allegations of overcharging and improper referral payments made in Georgia and “reported that federal investigators are expanding their investigation to examine Caremark’s referral practices in Michigan as well as allegations of fraudulent billing by insurers”. Surprisingly enough, company management, when reporting the indictment to the board, maintained that the company had done nothing wrong.
Colonies
Of course, Caremark’s senior management was wrong, and Caremark had to pay millions to resolve the enforcement actions. An agreement with the Department of Justice (DOJ), Office of Inspector General (OIG), United States Veterans Administration, United States Federal Employee Health Benefits Program, Federal Health Program and civilian medical uniformed services and related state agencies in all fifty states. and the District of Columbia demanded that a subsidiary of Caremark plead guilty to two counts of mail fraud, and demanded that Caremark pay $29 million in criminal fines, $129.9 million related to lawsuits payment practices, $3.5 million for alleged violations of the Controlled Substances Act, and $2 million, in the form of a donation, to a grant program established by the Ryan White Comprehensive AIDS Resources Emergency Act . Caremark has also agreed to enter into a compliance agreement with the Department of Health and Human Services (HHS).
In addition to all of these entities, Caremark was also sued by several private insurance company payors (“Private Payors”), who alleged that Caremark was liable for damages to them for allegedly improper business practices related to those involved in the OIG investigation. Following negotiations with the private payors, Caremark’s board of directors approved a $98.5 million settlement agreement with the private payors in 1996.
In addition to financial penalties, Caremark eventually agreed to implement a comprehensive compliance program. It created the position of Chief Compliance Officer (CCO) and established a Board-level Compliance and Ethics Committee which, with the assistance of external counsel, was tasked with reviewing existing contracts. and to approve any new form of contract in advance.
Join us for our next article where we examine the court’s rulings and rationales in care mark and Stone c. Ritter.
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