OIG Issues Guidance on Individual Permissive Exclusions

On October 20, the Department of Health & Human Services Office of the Inspector General, (”OIG”) released, Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act (”Guidance”).  The Guidance provides owners, officers, and managing employees an opportunity to better evaluate their exposure and limit any liability resulting from their control over an entity subject to OIG enforcement action.

Section 1128(b)(15) of the Social Security Act provides the Secretary of HHS the authority to exclude owners, officers, and managing employees “of an entity that has been excluded or has been convicted of certain offenses.”  OIG, having been delegated this authority by the Secretary, has published this internal advisory document setting out nonbinding factors to be considered in deciding whether to impose an individual permissive exclusion, under § 1128(b)(15).

Historically, OIG has not often exercised its permissive authority to exclude individuals from participation in federal health programs.  According to OIG’s “List of Excluded Individuals,” 28 individuals controlling an excluded or convicted entity have themselves been excluded pursuant to § 1128(b)(15), including 16 owners or operators, 7 officers and 5 practitioners.  The Guidance may indicate a new enforcement direction for OIG.

According to DLA Piper, the Guidance “is further evidence that OIG is serious about its recent focus on individual accountability and that it intends to exclude officers and managing employees, even without evidence that those individuals knew or should have known about the conduct giving rise to the entity’s criminal liability or exclusion.”  Skadden takes a similar position, stating:

This guidance finds OIG asserting the breadth of its authority by creating a presumption in favor of exclusion in certain cases and endorsing a new strict liability exclusion standard in other cases.  These enforcement positions appear likely to accelerate the government’s recent efforts to hold individuals accountable for corporate wrongdoing.

The Social Security Act, Section 1128(b)(15)

The Social Security Act sets out two types of exclusions: mandatory and permissive.  Section 1128(b)(15) exclusions are permissive, providing the Secretary with discretion on whether to exclude.  “OIG’s exercise of this discretion is not subject to administrative or judicial review.”

Individual permissive exclusions are “based upon the individual’s role or interest in a company that is excluded or is convicted of certain offenses,” otherwise known as a “sanctioned entity.”  Under § 1128(b)(15)(B) and related provisions, the term “sanctioned entity” means an entity that has been:

• Convicted of program-related crimes;
• Received a conviction relating to fraud, patient abuse, or obstruction of an investigation or audit;
• Received a felony or misdemeanor conviction relating to controlled substance; or
• Excluded from a title XVIII or State health care program.

Section 1128(b)(15)(A) establishes two different exclusionary standards for (1) individuals who have an ownership or control interest, and (2) officers and managing employees.  According to the Guidance, “[t]he statute sets a higher standard for exclusion of an owner, requiring evidence that the owner knew or should have known of the conduct that formed the basis for the sanction.”  Officers and managing employees may be excluded, regardless of their knowledge of the conduct forming the basis for the sanction.

OIG Guidelines: The Presumption

Despite the statutory distinction between (1) individuals who have an ownership or control interest, and (2) officers and managing employees, the Guidelines focus on evidence that an individual knew or should have known, rather than the individual’s role in the sanctioned entity.  According to the Guidance:

In general, if the evidence supports a finding that an owner knew or should have known of the conduct, OIG will operate with a presumption in favor of exclusion. This presumption may be overcome when OIG finds that significant factors weigh against exclusion…With respect to officers and managing employees, the statute includes no knowledge element. Therefore, OIG has the authority to exclude every officer and managing employee of a sanctioned entity. … While OIG does not intend to exclude all officers and managing employees, when there is evidence that an officer or a managing employee knew or should have known of the conduct, OIG will operate with a presumption in favor of exclusion. As with the presumption relating to owners, the presumption may be overcome when OIG finds that significant factors weigh against exclusion.

Therefore, if an individual exercises ownership, operational or managerial control over a sanctioned entity and there is evidence that such individual knew or should have known of the prohibited conduct, “OIG will operate with a presumption in favor of exclusion.”  This presumption may be overcome when undisclosed, “significant factors weigh against exclusion.”

According to Skadden, OIG “appears to have elevated (b)(15) from a permissive exclusion authority to a quasi-mandatory one by creating the presumption that owners, controllers, officers and managing employees of a sanctioned entity who know or should know of underlying conduct will be excluded.”

Guidelines: The Factors

When such evidence regarding knowledge is absent, the Guidelines establish “informal and nonbinding” factors that may be considering in deciding whether to exclude an officer or a managing employee.  (Note: owners cannot be excluded unless they knew or should have known of the conduct resulting in sanctions.)  The factors are broken down into four categories, with a series of questions associated with each category.  The categories are as follows:

1.      Circumstances of the Misconduct and Seriousness of the Offense

2.      Individual’s Role in Sanctioned Entity

3.      Individual’s Actions in Response to the Misconduct

4.      Information About the Entity

For individuals exercising operational or managerial control, the third factor provides the greatest opportunity to limit personal liability.  The specific factors within this category include:

1.      Did the individual take steps to stop the underlying misconduct or mitigate the ill effects of the misconduct (e.g., appropriate disciplinary action against the individuals responsible for the activity that constitutes cause for the sanction or other corrective action)? Did these actions take place before or after the individual had reason to know of an investigation? If the individual can demonstrate either that preventing the misconduct was impossible or that the individual exercised extraordinary care but still could not prevent the conduct, OIG may consider this as a factor weighing against exclusion.

2.      Did the individual disclose the misconduct to the appropriate Federal or State authorities? Did the individual cooperate with investigators and prosecutors and respond in a timely manner to lawful requests for documents and evidence regarding the involvement of other individuals in a particular scheme?

However, in providing the foregoing factors for consideration, OIG has reserved broad discretion in their application and disclaimed any reliance on them by the public:

The presence or absence of any or all of these factors does not constitute the sole grounds for determining whether OIG will pursue exclusion… They are not intended to limit OIG’s discretionary authority to exclude individuals or entities that pose a risk to Medicare and other Federal health care programs or program beneficiaries, nor do they create any rights or privileges in favor of any party.