Published in the Legal Intelligencer – August 1, 2016

On June 16, 2016, the U.S. Supreme Court issued a unanimous decision in the Medicaid case Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. ____ (2016), endorsing an expanded version of the “implied certification” theory as a basis for liability under the federal False Claims Act (“FCA”) but adopting a rigorous “materiality” standard for determining liability in such cases.

In its opinion authored by Justice Clarence Thomas, the Court confirmed that the “implied false certification” theory can, in fact, be a basis for liability, resolving a circuit split about the theory’s viability. Specifically, the Court refined the theory and identified two preconditions for its application where a material omission on a claim for payment may give rise to liability. First, when a provider submits a claim for government payment, the claim must not “merely request payment”; it must also “make specific representations about the nature of the goods or services provided.” Second, the provider’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” must make those representations “misleading half-truths.”

Despite the Court’s endorsement of an implied false certification theory of liability, providers may find solace in the Court’s newly-clarified, rigorous standard of materiality, which focuses on whether the defendant knowingly violated a requirement that the defendant knows is material to the government’s payment decision. This is a game changer for providers. For years, the government and plaintiffs have argued that the federal FCA can be violated if a hospital or other provider or supplier submitted a claim when the provider did not meet all compliance standards associated with that claim.  This has been known as the “implied certification” theory of liability; that providers were impliedly certifying to compliance with laws associated with the claim when it was submitted.  The circuit courts across the county have been split on whether to recognize the implied certification theory, and if so, what the test should be for applying the theory under the FCA. The Supreme Court has finally resolved this uncertainty. But while Escobar upholds the theory, it narrows its application with a new demanding standard of materiality which will offer providers an additional defense in FCA cases.

The Escobar Case: Relevant Facts and Procedural Background 

In Escobar, a teenage beneficiary of Massachusetts’s Medicaid program received counseling services for several years at a mental health facility owned and operated by a subsidiary of Universal Health Services, Inc. The patient had an adverse reaction to a medication that a purported doctor at the facility prescribed.  Her condition worsened, and she eventually died of a seizure. Her parents later discovered that few facility employees were actually licensed to provide mental health counseling, or authorized to prescribe medications or offer counseling services without supervision. They then filed a qui tam suit in federal district court relying, in part, on an implied certification theory of liability under the FCA. Specifically, the suit argued that Universal’s submission of Medicaid claims performed by improperly licensed employees impliedly violated the government’s conditions of payment and the claims were therefore “false or fraudulent.” Although the First Circuit had previously recognized the implied certification theory of liability under the FCA, the district court dismissed the case, finding that the complaint did not state any implied falsity because it relied on noncompliance with regulations that were conditions of participation in the Medicaid program, rather than conditions of payment by the program.

The First Circuit reversed the district court’s narrow interpretation of the implied certification theory, holding that conditions of payment, “which may be found in sources such as statutes, regulations, and contracts, need not be ‘expressly designated.’” Accordingly, the court concluded that state Medicaid regulations governing licensing and supervision for psychiatric cases were, in fact, conditions of payment, and therefore were “dispositive evidence of materiality.”

The Supreme Court granted certiorari to answer: (1) whether “implied certification” is a viable theory of liability under the FCA, and (2) if so, whether it could only apply where a provider violated a legal requirement that the government had expressly designated as a condition of payment. 

Fraudulent Omissions May be a Basis for FCA Liability 

The Court in Escobar first held that “the implied false certification theory can, at least in some circumstances, provide a basis for liability.” It reasoned that the FCA’s term “fraudulent” is “a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud.” “Because common-law fraud has long encompassed certain misrepresentations by omission,” the Court found it undisputed that “misrepresentations by omission can give rise to liability.”

Importantly, the Court explained that the misrepresentation must relate to the submitted claim’s “specific representations about the goods or services provided.” The Court emphasized that the Medicaid claims at issue had allegedly made representations “about the specific services provided by specific types of professionals,” but “failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” Therefore, Universal’s claims were “clearly misleading in context,” because they used specific billing codes and identifiers concerning the “types of treatment” and “specific job titles,” implying that the clinic’s personnel had the requisite training and qualifications for their jobs. Such misrepresentations fell “squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.”

Omitted Information Must be Material

The Court next held that in order for liability to attach under the FCA, the misrepresentation must be “’material” to the government’s decision to pay on the claim. However, the Court clarified that a misrepresentation about legal compliance does not become material simply because the government expressly labeled the legal requirement as a condition of payment, or because the government could choose to withhold payment if it knew about the noncompliance. What matters, rather, is “whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” The Court explained that “[a] statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information.” Thus, the fact that a legal requirement is labeled as a condition of payment is relevant to materiality, but “not automatically dispositive.”

The Court called the materiality standard “rigorous” and “demanding,” finding that it is insufficient that the government merely would have had the option to decline payment had it known of noncompliance.  It also emphasized that the FCA is not intended to punish “garden-variety breaches of contract or regulatory violations” or to impose “treble damages and other penalties for insignificant regulatory or contractual violations.”

Implications for Providers

This case will have an enormous impact on providers. Prior to this case, a violation of a “condition of payment” was arguably a clear basis to assert FCA liability.  Now, however, such a violation may not be a basis for liability under the materiality inquiry. The determination will depend on whether the provider submitted a claim that makes specific representations about the goods or services provided and knowingly failed to disclose noncompliance with a material statutory, regulatory or contractual requirement that makes the specific representations misleading. Accordingly, materiality will turn on specific facts, which may lead to further divergent lower courts and continued uncertainty for providers as to what constitutes a false claim. On the other hand, providers now have support for the argument that they cannot be liable if the government was fully aware of the alleged regulatory, statutory, or contractual violation but elected to pay a claim anyway. Thus, the Court’s clarification of the “demanding” material requirements actually appears to provide some relief for providers in light of what is otherwise a broad expansion of liability under the FCA.

*Rachel Lusk, Esquire, an associate with Lamb McErlane PC, contributed to this article.

Link to Legal Intelligencer Article