CLIENT ADVISORY: “You Don’t Know What You Don’t Know”: Providers Now May Be Subject to False Claims Act Liability Based on a Subjective Government Materiality Standard

The unanimous June 16, 2016 Supreme Court decision in Universal Health Services, Inc. v. United States and Massachusetts, ex. rel. Julio Escobar and Carmen Correa (“Escobar”) significantly expands provider exposure to liability under the False Claims Act (“FCA”). Prior to Escobar, Federal circuit courts disagreed as to whether providers could face FCA liability under the “implied certification theory.” Under that theory, the Federal government argues that by submitting a claim for reimbursement to a Federal health care program a provider implies that it has complied with Federal rules as a precondition to receiving payment. Thus, failures to disclose violations of regulations affecting eligibility to receive payment from a government program constitute false claims and subject a provider to penalties.

Under Escobar, the Supreme Court has largely accepted the government’s theory that providers may be held liable for false claims for violating “material” regulations if they do not disclose such violations when submitting claims. Practically, given the acceptance of the implied certification theory and the subjectivity in determining which violations are “material,” the Federal government now likely has broader power to recover funds through FCA litigation and settlements.

Prior Application of the Implied Certification Theory to FCA Liability

Federal appellate courts previously took three diverging approaches to the government’s implied certification theory cases. The first group rejected the theory completely, finding that only express falsehoods in seeking payment violated the FCA, i.e., a provider had to make a false statement or sign a statement that it has complied with the regulations and statutes to violate the FCA. A second group of federal appellate courts accepted the implied certification theory but only found providers liable for violations of statutes or regulations for which compliance was a “condition of payment.” A third group of federal appellate courts held that no condition of payment was required to find liability under the implied certification theory and that providers could face FCA liability for a violation of any applicable statute, regulation, or contract provision.


The Escobar Case and Its Bad Allegations

Arbour Counseling Services (“Arbour”), a subsidiary of Universal Health Services, Inc. (“UHS”), provided Yarushka Rivera with mental health services for five years. Arbour received payment for Rivera’s care through Massachusetts’ Medicaid program and was subject to all compliance requirements under that program. In May 2009, a “purported” doctor at Arbour prescribed Rivera a drug for bipolar disorder that caused her to have seizures. After continuing to take the drug under the health provider’s direction, Rivera suffered a seizure that resulted in her death.

Subsequent to Rivera’s death, an Arbour counselor revealed to Rivera’s parents that few of the staff at Arbour were actually licensed to provide mental health services and that there was little to no supervision of these medical providers. Specifically, the practitioner who prescribed the medication to Rivera represented that she was a psychiatrist when in fact she was a nurse who lacked authority to prescribe absent supervision. In sum, 23 of Arbour’s employees reportedly lacked the appropriate licenses and qualifications to provide mental health services, and Arbour had allegedly aided its employees in obtaining National Provider Identification (NPI) numbers that did not match their qualifications or actual licenses.

Rivera’s parents initially filed complaints with various Massachusetts agencies alleging Medicaid fraud against Arbour, as its ostensibly unlicensed professionals submitted reimbursement claims for services provided that did not comply with Massachusetts Medicaid regulations. Arbour was the subject of a corrective action plan, and two employees entered consent agreements with their licensing boards. Finding state remedies insufficient, Rivera’s parents subsequently filed a Federal qui tam action alleging FCA violations against UHS. A district court initially dismissed the case because it found that none of the alleged violations of the state Medicaid rules violated a “condition of payment”. However, taking Rivera’s allegations as true, the First Circuit Court of Appeals reversed, holding that the FCA liability should simply be based upon whether the provider knowingly misrepresented compliance with a material precondition of payment in submitting the claim—in this case, failing to employ appropriately licensed professionals and to adequately supervise staff.

UHS appealed the First Circuit’s decision to the US Supreme Court. The Supreme Court granted UHS a review to resolve the question of whether providers could be liable under the implied certification theory and whether the violation had to be of a condition of payment or if all violations of statutory, regulatory or contractual provisions could potentially result in FCA liability. The Supreme Court held in Escobar that the implied false certification theory can be a basis for FCA liability when two conditions are satisfied:

  • The claim must make “specific representations about the services provided” for which the claim is being requested and may not be a simple request for payment; and
  • Noncompliance must be with provisions that are material and therefore failure to disclose noncompliance must be considered “misleading” or “half-truths” perpetrated on the government to induce payment to the provider.

The Supreme Court remanded the case back to the lower court for additional fact finding on these matters.


Materiality remains Murky under the Implied Certification Theory

The Court’s FCA materiality standard is murky at best. The Court stated that a requirement may not be considered “material” merely because it is labelled a “condition of payment” or because the government would have the option to refuse to reimburse the provider if it knew of the provider’s noncompliance. Instead, proof of the materiality of a statutory, regulatory, or contractual requirement exists if the government has consistently refused to pay claims in the “mine run of cases” based on noncompliance with a particular requirement. The Court also stated that noncompliance with a requirement that is a condition of payment could still be considered a factor in determining whether the requirement is material but that this condition alone is not dispositive of materiality.

The Court’s materiality standard in Escobar is subjective and material provisions will not be easily identifiable for providers. In each FCA case, the materiality of a regulation and a provider’s knowledge that it is violating that regulation will be a fact-specific inquiry. With minimal case law developed to instruct them, lower courts will likely differ on whether the government rightfully considers a regulation material and providers have little to no instruction on the liabilities they face. The first providers sued under this standard may suffer as sacrificial lambs, as they will have little to no government or judicial guidance on potential culpability under the new standard. Even after the new standards are applied, each case is likely to have fact-specific nuances that may be distinguished in subsequent cases by the government and the courts. Further, the availability of case law on the matter all assumes that these claims will go to trial, which is unlikely given the cost and time necessary to litigate FCA cases. Providers accused of violating the FCA are likely to be bullied into accepting settlements, even on meritless claims, to avoid the costs of litigation.


Avoiding FCA Liability

Providers should always have effective programs and policies in place to maintain compliance with all requirements under government programs, but they should pay particular attention to how compliance efforts affect the care provided to patients. The Court appears to have taken a tough stance in Escobar due to the egregious facts pled in the case of a death of a 17 year old patient due to untrained, unlicensed, and unsupervised medical professionals. Regulatory noncompliance resulting in patient harm is not the only scenario that could lead to liability, but it is certainly a scenario that may attract negative attention. It is possible that in cases where the care provided or outcome would have been the same whether or not the provider complied with the requirement, the government may be less likely to find the noncompliance material.

Should you or your organization have any questions regarding FCA liability for your organization under the implied certification theory and new materiality standard, please contact Peter Mellette (Peter@mellettepc.com), Nathan Mortier (Nathan@mellettepc.com), Harrison Gibbs (Harrison@mellettepc.com), or Elizabeth Dahl (Elizabeth@mellettepc.com), or call Mellette PC at (757) 259-9200.

This Client Advisory is for general educational purposes only. It is not intended to provide legal advice specific to any situation you may have. Individuals desiring legal advice should consult legal counsel for up to date and fact specific advice

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