Legal and Regulatory Compliance

Supreme Court to Hear Fraud Case

April 7, 2016 1:22 pm

False Claims Act lawsuits might top the list of worries that keep hospital financial officers, compliance officers, and legal counsel awake at night. But a pending U.S. Supreme Court case offers hope for some relief.

The False Claims Act (FCA) penalizes anyone who “knowingly” submits a “false or fraudulent” claim for payment by the government. The penalties for violation of the act are severe: as much as $11,000 per false claim and three times the amount of the government’s damages. And given the number of claims hospitals submit, some FCA verdicts have been in the tens or even hundreds of millions of dollars.

In addition to its large penalties, the act is unusual in that it can be enforced not only by the Justice Department but also by “whistleblowers” who can collect 15-30 percent of the verdict if they prosecute the case successfully.

The Pending Case

The case before the Supreme Court—Universal Health Services, Inc. v. United States ex rel. Escobar, cert. granted Dec. 4, 2015, (No. 15-7)—involves a decision of the 1st U.S. Circuit Court of Appeals. It concerns the treatment of a Medicaid patient in Massachusetts who died as the result of an adverse reaction to medication for bipolar disorder. After the patient’s parents filed complaints with several agencies, it was discovered that the clinic where their daughter was seen had violated numerous state regulations. Some of the staff were not properly licensed or board-certified, and in at least one instance the patient was treated by an unsupervised nurse practitioner whom the plaintiffs were led to believe was a psychiatrist.

Based on findings that the clinic “had violated fourteen distinct regulations, including those relating to staff supervision and licensure,” the state imposed administrative sanctions on the clinic and on the individuals involved. The plaintiffs then filed an FCA lawsuit alleging that in submitting claims to Medicaid, the clinic impliedly represented that its staff members were properly licensed and supervised and, therefore, that this constituted fraud against the government.

In considering the clinic’s pretrial motion to dismiss, the trial court drew a distinction between requirements that the state imposes on providers as preconditions to reimbursement (which it called “conditions of payment”), and those imposed as requirements for program eligibility (“conditions of participation”). The court held that only a failure to comply with conditions of payment could make a claim false and that the Massachusetts regulations on licensure and supervision were merely conditions of participation. Because the plaintiffs had not alleged noncompliance with a condition of payment, the court dismissed the complaint in its entirety.

The 1st Circuit took a much broader view. It called the FCA an “expansive” statute that was meant “to reach all types of fraud, without qualification, that might result in financial loss to the government.” The appellate court found the payment/participation distinction irrelevant because “preconditions of payment … need not be ‘expressly designated’.” It disagreed with the trial court’s characterization of the Massachusetts regulations, saying that they “clearly impose conditions of payment,” and it added:

Although the record is silent as to whether [the clinic] explicitly represented that it was in compliance with conditions of payment when it sought reimbursement …, we have not required such “express certification” in order to state a claim under the FCA. We note, however, that each time it submitted a claim, [the clinic]
implicitly communicated that it had conformed to the relevant program requirements [and] that it was entitled to payment. (Emphasis added.)

Based on these conclusions, the 1st Circuit reversed the trial court and remanded the case for discovery and possible trial on the merits of the plaintiff’s claims. In the meantime, however, the Supreme Court has agreed to review the decision because it is at odds with the holding of at least one other appellate circuit. The Supreme Court’s argument is scheduled for April 19, and a decision is expected by July.

The 7th Circuit Case

The decision in a 7th U.S. Circuit Court of Appeals case, United States v. Sanford-Brown, Ltd., is in stark contrast to that of the 1st Circuit case. Sanford-Brown involved the Higher Education Act (HEA), which has a regulatory scheme somewhat similar in complexity to Medicare and Medicaid. The Sanford-Brown court concluded that it would be “unreasonable”

to hold that … the thousands of pages of federal statutes and regulations incorporated by reference into the PPA [program participation agreement—the equivalent of a Medicare provider agreement] are conditions of payment for purposes of liability under the FCA. Although a number of other circuits have adopted this so-called doctrine of implied false certification, we decline to join them… The FCA is simply not the proper mechanism for government to enforce violations of conditions of participation contained in—or incorporated by reference into—a PPA. Rather, under the FCA, evidence that an entity has violated conditions of participation … is for the agency—not a court—to evaluate and adjudicate.

Issues Before the Supreme Court

With this conflict between the holdings of two appellate courts, the Supreme Court has agreed to address two important questions:

  • Whether “implied certification” is a viable theory to establish liability under the FCA
  • If implied certification is a viable theory, whether a claim can be considered “legally false” if the healthcare provider failed to comply with a requirement that is not expressly stated to be a condition of payment.

Resolution of these issues is of vital importance to healthcare providers, given that it is estimated that hospitals submit upwards of 400,000 claims per day for Medicare alone. If each of those claims were said to “implicitly certify” perfect compliance with all Medicare/Medicaid program requirements and other statutes, regulations, and even sub-regulatory pronouncements, the potential FCA liability would be astronomical. Quoting an 11th U.S. Circuit Court of Appeals case, a joint amicus brief of the American Hospital Association (AHA), the Federation of American Hospitals (FAH), and the Association of American Medical Colleges (AAMC) asserts:

[N]othing in the terms of the statute creates liability “merely” for not following a regulation or having an insufficient internal policy; the proper question is whether a “provider knowingly ask[ed] the Government to pay amounts it does not owe.”


It’s important to note that there are many instances of the government making it clear that regulatory compliance is a precondition for payment. One example is the notice of liability and express certification statement that appears on the Medicare cost report and CMS Uniform Billing forms. Similarly, the Affordable Care Act specifically makes violation of the Anti-Kickback Statute “a false or fraudulent claim for purposes of [the FCA].” (Affordable Care Act § 6402(f), 42 U.S.C. § 1320a-7b(g).)

By way of contrast, the 1st Circuit’s theory has the potential to make all regulatory language a basis for FCA liability, no matter how arcane it is and irrespective of whether the government has stated that following it is a condition of getting paid. If that theory prevails in the Supreme Court, whistleblowers and their counsel will have wide latitude to bring lawsuits, thus diverting resources from healthcare providers’ patient care missions.

J. Stuart Showalter, JD, MFS, is a contributing editor for HFMA.


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