Recent Court Ruling's Impact on the False Claims Act

In June 2016, the U.S. Supreme Court, in the case of "Universal Health Services v. Escobar," unanimously adopted a form of the "implied certification theory" of making knowing fraudulent representations under the False Claims Act. In summary form, "Escobar" concerned the parents of a deceased Medicaid patient who died of a seizure in a Massachusetts hospital. The parents, as relators, filed a qui tam claim against a medical facility alleging that certain medical staff treating their child were not properly licensed or supervised, in violation of Massachusetts healthcare regulations, and by extension, it says the medical invoices that the facility submitted for payment to the government were fraudulent. Central to the relators' theory of liability was that even though the facility, through its invoices, did not expressly certify that it was in compliance with government regulations, nonetheless, the facility "implied" its compliance with state healthcare regulations by simply submitting the invoices for payment. 

At the trial level, a federal district court dismissed the relators' complaint by finding that no implied falsity existed because the complaint relied on noncompliance with regulations that were a condition of participation in the Massachusetts Medicaid program, rather than on conditions of payment under the program. The U.S. Court of Appeals for the First Circuit reversed the trial court's dismissal, holding that conditions of payment in statutes, regulations, and contracts, "need not be expressly designated." The Supreme Court granted certiorari to resolve a circuit split between the First, Second and Seventh Circuits, to determine whether implied certification is a viable False Claims Act theory. Ultimately, the majority opinion, authored by Justice Clarence Thomas, delivered a blow to the healthcare industry.

Escobar teaches practices that misrepresentations by omission can, at least in some circumstances, provide a basis for liability under the False Claims Act. The linchpin is that to be actionable, the misrepresentation must relate to the submitted claims specific representations about the goods or services provided. In the context of the case, the Supreme Court found misrepresentations because the facility used medical billing codes concerning the types of treatment provided and the specific job titles of staff, both of which implied that the facility's medical staff had the appropriate training and qualifications to perform their jobs.

The Supreme Court, through Escobar, also is telling the industry that there is a new materiality standard to determine whether a condition of payment violates the False Claims Act. The standard is now judged from a holistic approach, wherein courts are to determine materiality by reference to whether the government usually refuses to pay claims with "similar noncompliance." As said by the Supreme Court, "[w]hat matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government's payment decision."

The ruling establishes a landmine for the healthcare industry, both by opening up new areas of litigation based on the implied certification theory and by making materiality a context-specific standard. Now, would-be False Claims Act defendants in heavily regulated industries like healthcare must look to the government's "likely or actual" reimbursement decision, whether the government had also been aware of a misrepresentation. This loose test will undoubtedly lead to inconsistent rulings in the district courts. Now more than ever, healthcare organizations must stay abreast of the government's refusal to pay certain claims submitted by other similarly situated organizations.

Although Escobar, in general terms, is not an appetizing case for the health care industry, there are areas that remain available for would-be defendants to challenge liability under the implied certification theory. First, as in Escobar, the more specific a payment request is to the government, the more likely it is that an implied certification theory can attach. To illustrate, consider the medical billing codes in Escobar that gave the relators the basis to argue that the mere use of the codes suggested compliance with government programs. With this in mind, general requests for reimbursement, without any nexus to what a fraudulent representation might be, can create room to defeat the implied certification theory at the motion to dismiss stage. At a minimum, healthcare organizations would be wise to review their payment requests to the government and analyze what their payment requests can be construed to imply.

Coleman W. Watson is the managing partner of Watson LLP (Orlando, Fla). He counsels clients on matters related to the false claims act and intellectual property. Watson LLP has offices in Orlando, Atlanta, New York and Los Angeles. Watson may be reached at (407) 377-6634 or by email at coleman@watsonllp.com.