United States District Court, C.D. California
UNITED STATES OF AMERICA, ex rel. Doris Modglin and Russ Milko, Plaintiffs,
DJO GLOBAL INC., DJO LLC, DJO FINANCE LLC, ORTHOFIX, INC., BIOMET, INC. and EBI, LP, Defendants
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For United States of America, for ex rel Doris Modglin and Russ Milko, Plaintiff: David M Harris, LEAD ATTORNEY, United States Attorney's Office, Los Angeles, CA.
For Doris Modglin, ex rel, Russ Milko, ex rel, Plaintiffs: Gerald C Robinson, LEAD ATTORNEY, PRO HAC VICE, Gerald Robinson Law Firm PLLC, Minneapolis, MN; Linda R MacLean, LEAD ATTORNEY, Warren-Benson Law Group, Newport Beach, CA; David B Ketroser, MD, PRO HAC VICE, David B Ketroser MD JD, Minneapolis, MN; Donald R Warren, Phillip E Benson, Warren Benson Law Group, La Jolla, CA.
For The State of California, Plaintiff: Steven U Ross, LEAD ATTORNEY, CAAG - Office of the Attorney General, California Department of Justice, San Diego, CA.
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE SECOND AMENDED COMPLAINT
MARGARET M. MORROW, UNITED STATES DISTRICT JUDGE.
Qui tam relators Doris Modglin and Russ Milko filed this action against defendants DJO Global Inc. (" DJO Global" ), DJO, LLC (" DJO" ), DJO Finance LLC (" DJO Finance" ), Orthofix, Inc. (" Orthofix" ), Biomet, Inc. (" Biomet" ), and EBI, LP (" EBI" ) under seal and in camera on August 20, 2012. Relators invoked the court's federal question jurisdiction under 28 U.S.C. § 1331, and alleged a single claim for violation of the False Claims Act (" FCA" ), 31 U.S.C. § 3729(a)(1)(A) & (B). On December 26, 2012, they filed a first amended complaint, realleging the federal FCA claim and alleging state FCA claims under the equivalent statutes of 29 states: California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New
York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Virginia, and Wisconsin. On May 17, 2013, the United States declined to intervene in the case. On July 19, 2013, each of the 29 states also declined to intervene. The court unsealed the amended complaint that day.
On October 3, 2013, pursuant to a request by relators, the court dismissed Orthofix. On November 8, 2013, relators filed a second amended complaint, restating their federal and state FCA claims and adding EBI, LLC (also " EBI" ) as a defendant. On January 22, 2014, the parties filed a stipulation to dismiss DJO Global and DJO Finance as defendants;  the court entered an order on the stipulation on January 28, 2014. On February 20, 2014, the court granted defendants' motion to stay discovery until it decided their pending motion to dismiss the second amended complaint. Relators oppose the dismissal motion. On May 5, 2014, the court held a hearing on the motion. Following the hearing, the court took the motion under submission and directed the parties to file supplemental briefs addressing four questions. The parties did so on July 7, 2014.
I. FACTUAL BACKGROUND
Relators assert that defendants -- manufacturers and distributors of durable medical equipment (" DME" ) -- fraudulently
caused the government to disburse money by filing claims with Medicare and other federal healthcare plans for reimbursement of their provision of noninvasive, bone-growth stimulators (" stimulators" ) which they knew had been prescribed by physicians for an off-label purpose, i.e., one not specifically approved by the Food and Drug Administration (" the FDA" ). Defendants allegedly failed to reveal to Medicare and other federal healthcare plans that the stimulators were to be used for off-label purposes. Before one can understand the allegations in the complaint, it is necessary to provide an overview of the statutory and regulatory scheme that governs both FDA approval of medical devices and the coverage of such devices by Medicare and other federal programs. The court begins with background on FDA approval of medical devices.
A. Background Regarding FDA Approval of Medical Devices
One of the " core objectives" of the Food, Drug, and Cosmetic Act (" the FDCA" ), 21 U.S.C. § 301 et seq., is to ensure that " there is reasonable assurance of the safety and effectiveness of devices intended for human use." Food and Drug Administration v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133-34, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000) (citing 21 U.S.C. § 393(b)(2)). To that end, the FDCA classifies medical devices in three categories: Classes I, I, and III. 21 U.S.C. § 360c(a). Class III devices include those that present a potential unreasonable risk of illness or injury. Id., § 360c(a)(1)(C). Because of the risk associated with such devices, the FDA has determined that manufacturers of such devices must submit premarket approval (" PMA" ) applications to the FDA and obtain premarketing clearance before offering the devices for sale. 42 C.F.R. § 405.201(b). Class III devices that do not have PMA approval cannot be marketed and are considered " adulterated." 21 U.S.C. § 351(f)(1)(B) (" A . . . device shall be deemed to be adulterated . . . if it is a class III device . . . which . . . is required to have in effect an approved application for premarket approval . . . and . . . which has an application which has been suspended or is otherwise not in effect" ); 42 C.F.R. § 405.201(b).
PMA approval is based on a determination by the FDA that the PMA application contains sufficient valid scientific evidence to assure that the device is safe and effective for its intended use. 21 C.F.R. § 814.2(a). It is " a 'rigorous' process in which the manufacturer submits to the FDA extensive study reports, design specifications and descriptions, samples of the device, and proposed labeling, and the FDA conducts a comprehensive review and
evaluation of all the submitted documents and materials[.]" Kashani-Matts v. Medtronic, Inc., No. SACV 13-01161-CJC (RNBx), 2013 WL 6147032, *1 (C.D. Cal. Nov. 22, 2013).
If a medical device is used for a purpose other than that for which it has obtained PMA approval, the usage is " off-label." Carson v. Depuy Spine, Inc., 365 F.App'x 812, 815 (9th Cir. Feb. 16, 2010) (Unpub. Disp.) (" Drugs and medical devices are approved or cleared by the FDA for marketing with labels describing the uses and the patient conditions which have been reviewed in the approval or clearance process. Any use by a physician which differs from the use described in the label or from the patient conditions described in the label is called 'off--label'" ). The FDCA explicitly protects physicians' abilities to prescribe devices for such use. 21 U.S.C. § 396 (" Nothing in this chapter shall be construed to limit or interfere with the authority of a health care practitioner to prescribe or administer any legally marketed device to a patient for any condition or disease within a legitimate health care practitioner-patient relationship" ); see also Houston v. Medtronic, Inc., No. 2:13-cv-01679-SVW (SHx), 2014 WL 1364455, *1 n. 1 (" Physicians are permitted to use Class III devices in off-label manners" ). Indeed, off-label use of medical devices is " generally accepted" within the medical community, and section 396 of the FDCA " expressly disclaims any intent to directly regulate the practice of medicine." Buckman Co. v. Plaintiffs' Legal Committee, 531 U.S. 341, 351, 121 S.Ct. 1012, 148 L.Ed.2d 854 & n. 5 (2001) (citing Beck & Azari, FDA, Off-Label Use, and Informed Consent: Debunking Myths and Misconceptions, 53 FOOD & DRUG L.J. 71, 72 (1998) (" Off-label use is widespread in the medical community and often is essential to giving patients optimal medical care, both of which medical ethics, FDA, and most courts recognize" )); see also Kashani-Matts, 2013 WL 6147032 at *1 n. 4 (" The FDA does not prohibit or regulate off-label use of medical devices by medical professionals, and the Supreme Court has emphasized that off-label use is not merely legitimate but important in the practice of medicine," citing Buckman, 531 U.S. at 350).
The FDCA does, however, expressly prohibit class III device manufacturers from marketing a PMA-approved device for an off-label use. 21 U.S.C. § 331 (proscribing, inter alia, " [t]he introduction . . . into interstate commerce of any . . . device . . . that is adulterated or misbranded" ); 21 C.F.R. § 814.80 (stating that once the FDA has approved a PMA application, the manufacturer of the approved device may not manufacture, package, store, label, distribute, or advertise the device in a manner that is inconsistent with any conditions of approval specified in the PMA approval order for the device). Because off-label usage of medical devices " is an accepted and necessary corollary of the FDA's mission to regulate in th[e] [medical field] without directly interfering with the practice of medicine," however, Buckman, 531 U.S. at 349-50, " a manufacturer is not liable [for having violated the FDCA] merely because it sells a device
with knowledge that the prescribing doctor intends an off-label use," Carson, 365 F.App'x at 815. The manufacturer can only be liable for violating the FDCA if it markets or promotes the device for that purpose. If a device manufacturer wishes to market a device for an off-label purpose, it must submit a PMA supplement for review and approval by the FDA. 21 C.F.R. § 814.39.
B. Facts Alleged in the Second Amended Complaint Regarding FDA Approval of Defendants' Stimulators
Relators allege that DJO, Biomet, and EBI -- a wholly owned subsidiary of Biomet -- manufacture and market DME, including stimulators, throughout the United States. They assert that the FDA categorizes stimulators as class III devices, meaning that they must receive PMA approval before they can be marketed. More specifically, they allege that DJO manufactures and markets a stimulator called the SpinaLogic, and that the FDA has approved the SpinaLogic as an adjunct electrical treatment to primary lumbar spinal fusion surgery under PMA Number P910066. Biomet and EBI allegedly manufacture and market a stimulator called the SpinalPak. The FDA has approved the SpinalPak as an adjunct electrical treatment to primary lumbar spinal fusion surgery under PMA Number P850022.
C. Background Regarding Medicare Coverage of Medical Devices
1. Coverage Determinations by Medicare
The Medicare program is a federally funded health insurance program for the aged and disabled created by the Social Security Act (" the Medicare Act" ), 42 U.S.C. § 1395, et seq. See International Rehabilitative Sciences Inc. v. Sebelius, 688 F.3d 994, 997 (9th Cir. 2012) (" Medicare is the federal health insurance program for the elderly and disabled" ). Part B of the Medicare Act provides medical insurance for medical and other health services obtained by individual plan participants; this includes stimulators and other DME provided to Medicare patients by a DME provider. Id. (citing 42 U.S.C. § § 1395j, 1395k(a)(2), 1395m). Under Part B, " Medicare beneficiaries receive medical treatment and the providers submit claims for government reimbursement." Id. (citing § 1395n). Under the Medicare Act,
only devices that are " reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member" can be reimbursed. 42 U.S.C. § 1395y(a)(1)(A). This limitation on coverage is a method of controlling Medicare costs. International Rehabilitative Sciences, 688 F.3d at 997. Under the Act,
" [a] device is not 'reasonable and necessary' -- and thus is not eligible for Medicare coverage -- if it is: [1)] Not 'safe' and 'effective' -- that is, if the device has not 'been proven safe and effective based on authoritative evidence' or is not 'generally accepted in the medical community as safe and effective for the condition for which it is used'; [2)] '[E]xperimental' -- that is, 'investigational'; [3)] Not '[a]ppropriate' for the individual beneficiary's needs; or [4)] '[S]ubstantially more costly than a medically appropriate and realistically feasible alternative pattern of care.'" Id. (citing § 1395y(a)(1)(A) and 54 Fed. Reg. 4302, 4303-04 (Jan. 30, 1989); 60 Fed. Reg. 48417, 48418 (Sept. 19, 1995)).
Cf. Medicare Program Integrity Manual § 13.7.1. (stating that " [i]n order of preference, [local coverage determinations] should be based on:  Published authoritative evidence derived from definitive randomized clinical trials or other definitive studies, and  General acceptance by the medical community (standard of practice), as supported by sound medical evidence" ). " [The Centers for Medicare and Medicaid Services ('CMS')] uses the FDA categorization of a device as a factor in making Medicare coverage decisions." 42 C.F.R. § 405.201(a)(1). Thus, under this scheme, " FDA clearance [ ] is necessary, but not sufficient, for Medicare coverage. . . . To be 'reasonable and necessary' for treatment, a device must be 'safe and effective,' but other considerations are also relevant -- like whether there are less costly but equally effective devices available." International Rehabilitative Sciences, 688 F.3d at 1002 (emphasis omitted).
In its Medicare National Coverage Determinations Manual (" the Medicare Manual" ), the Department of Health and Human Services (" HHS" ) has considered the FDA categorization of devices and determined generally that " [d]evices that may be covered under Medicare include the following categories:  Devices approved by the FDA through the Pre-Market Approval (PMA) process;  Devices cleared by the FDA through the 510(k) process;  FDA-approved IDE Category B devices; and  Hospital Institutional Review Board (IRB) approved IDE devices." 
Within these general categories of devices eligible for coverage, HHS " may make [Medicare] coverage determinations [for certain types of devices] via up-front rules." The agency, however, has " discretion . . . whether to make [broad] determinations [as to whether a particular device is reimbursable] . . . or [whether to have Medicare contractors make that decision based on a] case-by-case adjudication." Id. at 1001. When HHS engages in rulemaking regarding the scope of coverage for certain devices, it issues National Coverage Decisions (" NCDs" ). " An NCD is a determination . . . of whether a particular item or service is covered nationally under
Medicare." 42 C.F.R. § 405.1060(a)(1). NCDs are compiled in the Medicare Manual. " Once published . . ., an NCD is binding on all Medicare carriers."  Almy v. Sebelius, 679 F.3d 297, 299 (4th Cir. 2012) (" [T]he Secretary [of HHS] can make a 'national coverage determination' (NCD) binding throughout the Medicare system and not subject to review by administrative law judges" ); see also 42 C.F.R. § 405.1060(a)(4) (" An NCD is binding on fiscal intermediaries, carriers, . . . [administrative law judges], and the [Medicare Appeals Council]," among others). Additionally, individual carriers -- the private insurance carriers with whom HHS contracts to administer claims -- can issue Local Coverage Determinations (" LCDs" ). LCDs address local coverage issues. Almy, 679 F.3d at 299-300. If no NCD or LCD addresses a particular device, contractors determine coverage on a case-by-case basis. Id. at 300 (" Finally, if no NCD or LCD is in place, 'contractors may make individual claim determinations,' including whether a particular DME meets the statutory requirement of being 'reasonable and necessary'" (citing 68 Fed. Reg. 63,693)).
The reimbursement of stimulators is covered by NCD 150.2. NCD 150.2 states that stimulators are covered by Medicare for six uses, one of which is " as an adjunct to spinal fusion surgery" for certain patients. There are also four LCDs that address the coverage of stimulators. Each mirrors the criteria set forth in NCD 150.2, in that it provides that stimulators are covered, inter alia, " as an adjunct to spinal fusion surgery."  Neither NCD 150.2 nor the four LCDs covering stimulators distinguish between stimulators used on one part of the spine, e.g., the cervical spine, versus another, e.g., the lumbar spine. Nor do they distinguish
between stimulators based on on-label versus off-label use.
NCD 280.1, the " Durable Medical Equipment Reference List" is a " quick reference tool" that applies " (where appropriate) to all DME national coverage determinations (NCDs)."  It provides a list of
" generic categories of equipment on which NCDs have been made by . . . CMS. . . . In the case of equipment categories that have been determined by CMS to be covered under the DME benefit, the list outlines the conditions of coverage that must be met if payment is to be allowed for the rental or purchase of the DME by a particular patient, or cross-refers to another section of the manual where the applicable coverage criteria are described in more detail. With respect to equipment categories that cannot be covered as DME, the list includes a brief explanation of why the equipment is not covered. . . . When the contractor receives a claim for an item of equipment which does not appear to fall logically into any of the generic categories listed, the contractor has the authority and responsibility for deciding whether those items are covered under the DME benefit. These decisions must be made by each contractor based on the advice of its medical consultants, taking into account:  The Medicare Claims Processing Manual, Chapter 20, 'Durable Medical Equipment, Prosthetics and Orthotics, and Supplies (DMEPOS)[; ] Whether the item has been approved for marketing by the Food and Drug Administration (FDA) and is otherwise generally considered to be safe and effective for the purpose intended; and  Whether the item is reasonable and necessary for the individual patient." 
NCD 280.1 thus serves as a first point of reference for contractors attempting to determine whether a certain device or a certain use of a device is covered. Specifically, it provides an index of some of the national coverage determinations Medicare has made. It lists some devices that are covered and refers the reader to the NCD controlling that device. It also lists some devices that are not covered and articulates why HHS has determined that that device cannot be covered. For devices that HHS has not explicitly declared covered or uncovered, NCD 280.1 sets forth the factors a contractor must consider in making a case-by-case coverage determination. NCD 280.1 is not comprehensive, however. Certain devices that are covered by a particular NCD are not referenced in NCD 280.1. This is because NCD 280.1 was meant only to aid in determining coverage for " certain pieces of DME and especially for those items commonly referred to by both brand and generic names."  As the NCDs are binding on Medicare contractors, the contractors must follow an NCD dictating coverage for a certain device, even if that device is not listed in NCD 280.1.
2. The Reimbursement Process
To submit a claim for reimbursement, DME providers fill ...