Legal and Regulatory Compliance

High Court Decides False Claims Act Case

August 4, 2016 12:31 pm

The Supreme Court approves but narrows the scope of “implied certification” under the False Claims Act.

The Supreme Court on June 16 ruled that “implied certification” of regulatory compliance is a viable theory for prosecuting False Claims Act (FCA) cases “in certain circumstances.”

According to implied certification theory, submission of a claim to the government carries with it the implication that all conditions of payment have been satisfied; and, therefore, any undisclosed violation of a “material statutory, regulatory, or contractual requirement” renders the claim fraudulent.

The Case

As we reported here in April, the case―Universal Health Services, Inc. v. United States ex rel. Escobar―involved claims for the treatment of a Medicaid patient in Massachusetts who died while being treated for bipolar disorder. It was later discovered that the clinic where the patient was seen “had violated fourteen distinct regulations, including those relating to staff supervision and licensure,” and that administrative sanctions had been imposed on it by the state.

In their subsequent FCA lawsuit, the patient’s parents argued that when the clinic submitted claims to Medicaid it had impliedly represented that its staff members were properly licensed and supervised and, therefore, had committed fraud against the government. A federal trial court in Massachusetts disagreed and threw out the lawsuit. It held that the regulations on licensure and supervision were merely “conditions of participation” and that only a failure to comply with “conditions of payment” could make a claim false.

When the case was appealed, the U.S. Court of Appeals for the First Circuit took a much broader view. Calling the FCA an “expansive” statute that was meant “to reach all types of fraud, without qualification,” the appellate court adopted the implied certification theory and reinstated the plaintiffs’ suit.

Not satisfied with this result, the government petitioned for Supreme Court review. It pointed out that a different federal appellate court had called the implied certification theory “unreasonable” and had declined to adopt it. This “split” between the appellate circuits prompted the Supreme Court to accept the Massachusetts case and to address these specific issues.

  • Whether implied certification is a viable theory to establish liability under the FCA
  • If implied certification establishes liability under the FCA, 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.

The Decision

In an opinion written for a unanimous court, Justice Clarence Thomas answered the first question in the affirmative and the second with a resounding “sometimes.” 

As to the first question, the decision holds that “liability can attach when the defendant submits a claim for payment that makes specific represen­tations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.”

Regarding the second issue, Justice Thomas wrote that liability does not depend on the governmental requirements being expressly designated as conditions of payment; but if they are not, a defendant can still be liable. On the other hand, “even when a requirement is expressly designated a condition of payment, not every violation of such a re­quirement gives rise to liability.” What matters is not the label, but whether the defendant knows the requirement is “material” (relevant and significant) to the government’s decision whether to pay the claim.

Materiality is a “demanding” standard, Justice Thomas wrote, and thus he declined to adopt the government’s broad position that any violation of any governmental requirement would be the basis for liability. Instead, he attempted to clarify how the “rigorous materiality requirement” should be viewed. For example, he pointed out that “[if] the Government consis­tently refuses to pay claims … based on noncompliance with [a certain] requirement,” that is evidence of materiality. Similarly, “if the Govern­ment pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”

Because the trial and appellate courts each applied a different interpretation than that which Justice Thomas articulated, the Massachusetts case was sent back to the lower courts for further proceedings.

The Implications

Nearly seven years after their daughter’s death, the Escobars still do not have resolution of their lawsuit. Healthcare leaders are left similarly without satisfaction because there is no clear rule for determining what constitutes a false claim. We are left to wonder which of the hundreds of thousands of Medicare and Medicaid regulations and guidance documents will be considered “material” to a claims payment decision.

“The Supreme Court made it more difficult for plaintiffs, but the industry was hoping for an outright rejection of the implied certification theory, or at the very least, a bright-line clarification of what violations could give rise to a claim of fraud under the theory,” says John Petrelli, partner in the Houston office of Baker, Hostetler. “It didn’t materialize. Instead, the Court sought to strike a balance with a more ‘rigorous’ materiality requirement, which could very well lead to more questions than answers. This will undoubtedly lead to protracted discovery, greater litigation costs, and more appellate litigation.”

Agreeing with Petrelli is Delphine O’Rourke of Hall, Render in Philadelphia. “This decision stands to increase healthcare providers’ liability and exposure to legal disputes,” she says. “Providers can no longer rely upon the clear distinction between ‘conditions of payment’ and ‘conditions of participation.’ Instead, they must look to the possible violation itself, the likelihood that it will be relevant to the government’s payment decisions, and to the government’s previous behavior in response to such violations.”

Notwithstanding Justice Thomas’ attempt to provide clarity, the decision is unlikely to curb frivolous lawsuits, says Rebekah Plowman of Jones Day. “Instead, the parties will need to engage in extensive discovery efforts to establish who had knowledge of the materiality of the relevant governmental requirements and whether claims have been filed despite knowledge that the requirements were violated. The added litigation costs will pressure healthcare providers to consider settling cases that otherwise could be defended.”

All three experts agree that the full impact of Escobarwill not be known for years. In the meantime, litigants and the federal courts will struggle with the questions of materiality and what makes a claim “false and fraudulent” under the FCA. Stay tuned.

See related article: False Claims Act Penalties are Rising

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

Interviewed for this article: John Petrelli is a partner in Baker, Hostetler, Houston.

Delphine O’Rourke is managing partner of the Philadelphia Office of Hall Render and regional counsel, Ascension Health.

Rebekah Plowman is partner, Jones Day, Atlanta, Ga.


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