Recently, the Supreme Court (“the Court”) considered whether whistle-blowers and the government should be allowed to bring False Claims Act (“FCA”, “the Act”) cases under the implied false certification theory. In a unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (“Escobar”) issued on June 6, 2016, the Court upheld the implied certification theory of knowingly fraudulent representations, but adopted a heightened materiality standard for determining liability under FCA. While the Court’s ruling appears to allow for whistle-blowers and the government to sue healthcare providers under the implied false certification theory under the FCA, the Court’s limitation (e.g. materiality) does allow for healthcare providers (e.g., defendants) to argue that not all claims submitted for payment implicitly means compliance with statutory, regulatory, and contractual requirements.
Background of the Escobar Case
The Escobar case involved a teenage beneficiary of Massachusetts’s Medicaid program who was receiving counseling services for years at a mental health facility owned and operated by a subsidiary of Universal Health Services, Inc. (“Universal”). The patient died under Universal’s care from an adverse reaction to medication. The plaintiffs later discovered that several mental health professionals treating the patient (as well as other patients) were not licensed and were not qualified to provide treatment. The plaintiffs filed a qui tam suit partly relying on the implied false certification theory of liability under the FCA. The plaintiffs argued that by submitting Medicaid claims performed by improperly licensed employees, Universal impliedly violated the government’s conditions of payment and therefore the claims were “false or fraudulent.”
Implied False Certification Theory
The Act is an antifraud statute that imposes liability on person or entity that (1) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the government or (2) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim. The Act does not define “false or fraudulent claim” which led to the development of the implied false certification theory. The implied false certification theory means when a healthcare provider submits a claim for payment or reimbursement, it impliedly certifies compliance with all applicable statutes, regulations, or government contractual requirements.
The Supreme Court Decision
In Escobar, the Court held that FCA liability can be imposed based on the implied false certification theory when submitting a claim makes specific represen¬tations about services rendered, but fails to disclose non-compliance with material statutory, regulatory, or contractual requirements that make those representations misleading. The Court also held that the claims at hand “may be actionable because they do more than demand payment.” The Court found that Universal claims constituted misrepresentations because Universal submitted claims for payment using payment codes for specific counseling services (i.e., specific type of treatment) and using National Provider Identification (“NPIs”) numbers corresponding to specific job titles (i.e., violating licensing requirements for mental health facilities).
The Court also held that “FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment.” In the decision, it states that the Act does not limit claims to misrepresentation about express conditions of payment and there is no such restriction.
Furthermore, the decision states that under the Act’s materiality requirement, “statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment.” The Court said that a defendant can have “actual knowledge” that a condition is material even if the government does not expressly call it a condition of payment. What matters is whether the defendant knowingly violated a requirement that the defendant knows is material to the government’s payment decision (e.g., using specific payment codes and licensing requirements/NPIs). Thus, to be actionable under the FCA, the misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the government’s payment decision.
The decision went on to say that the FCA’s materiality requirement is “demanding”. When evaluating the FCA’s materiality requirement, the government’s ability to expressly identify a provision as a condition of payment is relevant, but not automatically dis-positive. A misrepresentation is not deemed material merely because the government designates compliance with a particular requirement as a condition of payment. Nor when the noncompliance is minor or insubstantial. Moreover, it is strong evidence that those requirements are not material when the government pays a particular claim in full despite the government’s actual knowledge that certain requirements were violated. Thus, the Court held that the Act does not support that any statutory, regulatory, or contractual violation is material per se if the defendant merely knows that the government would have been entitled to refuse payment were it aware of the violation. The falsehood has to be so serious that the government in fact would withhold payment.
What does this mean for healthcare providers?
The consequences of the Escobar ruling may be unknown, but the decision is impactful. First, the Court expressly declined to address whether an implied false certification theory was viable based on sole submission of a claim. This can lead to split decisions in the lower courts thereby confusing providers and creating a space for an increase in the number of qui tam suits.
Second – the Court’s materiality standard. In the decision, FCA liability can be imposed based on the implied false certification theory with or without an express condition of payment if the violation is “material” to the government’s payment decision and the provider “knows” it is material. This changed the basis to assert FCA liability as the violation does not solely have to be one of a “condition of payment” but can include “conditions of participation” or other statutory, regulatory or contractual requirements. By expanding the bases to assert FCA liability, providers may be subjected to more qui tam suits given the number of complex healthcare regulations providers must comply with and the large number of claims submitted daily.
Despite this, the materiality standard set forth the requirements the government (and whistle-blower) must allege and prove. First, the government must allege and prove that a provider “knew” the violation at issue was material to the payment decision. Second, it must prove that the violation requirement is indeed “material” to the decision to pay, which may require witness testimony. Lastly, the government’s payment history will be a factor in determining “materiality,” in cases where history of payment is relevant.
The ruling in the Escobar case created different challenges for plaintiffs (e.g., whistle-blowers/government) and defendants (e.g., healthcare providers). Time will tell exactly how these challenges will play out. In the meantime, providers should continue to monitor court decisions regarding FCA cases, identify lessons learned based on the facts of the case, and consult with general or outside consult on how the rulings may impact their organization.