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Supreme Court ruling potentially expands false claims liability for healthcare providers

published in McAfee & Taft Healthcare Alert | June 16, 2016

By Elizabeth L. Dalton

In a much-anticipated decision, the U.S. Supreme Court ruled today that the implied false certification theory may form the basis for liability under the False Claims Act (FCA), resolving a split of among the federal Circuit Courts of Appeal. In Universal Health Services v. U.S. ex rel. Escobar, the court unanimously held that the implied false certification theory can be a basis for FCA liability when a defendant submitting a claim makes specific representations about the goods or services provided, but fails to disclose non-compliance with material statutory, regulatory, or contractual requirements that make those representations misleading. Conversely, the court held that the failure to satisfy all of the conditions of payment will not necessarily result in FCA liability.

In order to participate as a provider or supplier in federal healthcare programs, certain “conditions of participation” must be satisfied. Additionally, in order to submit claims for specific items or services rendered numerous “conditions of payment” must be satisfied.

The FCA imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the federal government. Healthcare providers and suppliers must certify that they are entitled to payment at the time of claims submission. The “express false certification” theory of liability applies when a party falsely certifies compliance with a particular condition of payment. The “implied false certification” theory of liability applies when a party falsely implicitly certifies that it conformed to the relevant program requirements, or conditions of participation. Thus, the implied false certification theory is broader than the express false certification theory because it includes certifications that conditions of payment and conditions of participation were satisfied.

The Escobar case involved a mental health facility operated by the defendant, where a young girl who was a Medicaid beneficiary received counseling. Over the course of five years, the girl received counseling services from five medical professionals intermittently. Diagnosed as bipolar, she was prescribed medication to which she had an adverse reaction and died. Her parents subsequently learned that, of the five treating professionals, only one had been properly licensed. The psychologist who diagnosed the girl did not hold a state license, and the practitioner who prescribed the medication was a nurse who required supervision in order to prescribe. The family alleged such supervision was lacking.

The girl’s family filed a qui tam, or whistleblower, lawsuit, alleging that the clinic had violated the FCA under an implied false certification theory of liability due to the failure to comply with staffing and licensing conditions of participation. The clinic argued that the claims it submitted correctly described the specific services provided. The district court ruled in the clinic’s favor, but the U.S. Court of Appeals for the First Circuit reversed. The Supreme Court granted certiorari to resolve the disagreement among the courts of appeal over the validity and scope of the implied false certification theory of liability.

The court held that the implied false certification theory can be a basis for FCA liability when a defendant submitting a claim makes specific representations about the goods or services provided but fails to disclose non-compliance with material statutory, regulatory, or contractual requirements that make those representations misleading. Claims may be actionable because they do more than merely demand payment; they may constitute common law fraud where they state the truth only so far as it goes, while omitting critical qualifying information.

In making its ruling, the court stated, “Accordingly, we hold that the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes these representations misleading half-truths.”

The court held that the clinic’s claims that it had provided specific types of treatment, submitting Medicaid reimbursement claims by using identification numbers corresponding to specific job titles whose qualifications were not satisfied, constituted half-truths. “Anyone informed that a social worker . . . provided a teenage patient with individual counseling services would probably – but wrongly – conclude that the clinic had complied with core [state] Medicaid requirements” that the counselor have specialized training and possess the minimum prescribed qualifications for the job.

However, a misrepresentation must be material to the government’s payment decision in order to be actionable under the FCA, whether it is a condition of payment or a condition of participation. The court rejected the government’s “expansive view” that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the government would be entitled to refuse payment were it aware of the violation.

The court’s decision will certainly have the effect of expanding potential liability of healthcare providers and suppliers under the FCA, at least in those jurisdictions that did not recognize the implied certification theory before. Although the court suggests that the FCA has “stringent materiality and scienter provisions” that will enable billing parties “subject to thousands of complex statutory and regulatory provisions” to “anticipate and prioritize compliance obligations,” in truth, the scienter, or “knowledge,” provisions under the FCA are very broad. A defendant need not have actual knowledge of falsity; it is enough that a defendant acts in deliberant ignorance or reckless disregard of the truth or falsity of the information. The implied certification theory may remain inapplicable for claims that are not deemed to “make specific representations about the good or services provided,” and the materiality of any non-disclosed noncompliance will be heavily argued. Nonetheless, healthcare providers and suppliers should brace themselves for heightened FCA liability risk.

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