United States: Supreme Court Preserves But Significantly Changes "Implied Certification" Theory of False Claims Act Liability

On June 16, 2016, the Supreme Court issued its opinion ("Op.") in Universal Health Services v. U.S. ex rel. Escobar ("Escobar"), a case testing the viability and scope of the implied certification theory of False Claims Act ("FCA") liability.  Under the implied certification theory, a defendant may be liable under the FCA based on the its failure to comply with certain statutory, regulatory, or contractual provisions, even if the defendant did not expressly certify compliance..  The circuits have split, both on whether an implied certification theory is viable at all and, if so, when non-compliance can trigger FCA liability.

Writing for a unanimous Court, Justice Thomas held the implied false certification theory can be a basis for liability when: (1) a defendant submits a claim that does not merely request payment, but also makes specific representations about the goods or services provided, and (2) knowingly fails to disclose the defendant's noncompliance with statutory, regulatory, or contractual requirements.  Under these circumstances, "liability may attach if the omission renders those representations misleading", Op. at 2 (emphasis added), and the resulting misrepresentation is material to the Government's decision to pay the claim.

Importantly, the Court also held that FCA liability under the implied certification theory "does not turn upon whether those requirements were expressly designated as conditions of payment.  Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment.  Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability.  What 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."  Op. at 2 (emphasis added).

The Court's opinion represents a substantial departure from the bulk of previous FCA jurisprudence, blurs or eliminates prior 'bright line' rules as to the types of non-compliance that can lead to FCA liability, and instead will instill fact-laden inquiries into the 'materiality' of any non-compliance.  As such, the opinion not only creates considerable uncertainty about the degree of statutory, regulatory or contractual non-compliance that may put health care suppliers, providers and others at risk for the FCA's treble damages and penalties, but may increase the likelihood that allegations of FCA violations based on non-compliance can survive early legal challenge.

Implied Certification Affirmed Only For Claims That Make Specific Representations That Are Rendered "Half-Truths" By Omissions About Non-Compliance

In holding that the FCA encompasses misleading omissions, Justice Thomas looks to the common law definition of fraud, explaining that "the term 'fraudulent' is a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud" and that "common-law fraud has long encompassed certain misrepresentations by omission."  Op. at 9.  Justice Thomas explicitly did not resolve, however, "whether all claims for payment implicitly represent that the billing party is entitled to payment."  Rather, he addressed only circumstances where, as in Escobar, claims contain "representations that state the truth only so far as it goes, while omitting critical qualifying information."  Op. at 9-10.

In Escobar, the defendant allegedly submitted claims for payment using payment codes that correspond to specific counseling services and with National Provider Identification numbers corresponding to specific job titles, thereby representing to Massachusetts Medicaid that it had provided these services through professionals with certain qualifications.  Justice Thomas found that "[a]nyone informed that a social worker at a Massachusetts mental health clinic provided a teenage patient with individual counseling services would probably – but wrongly – conclude that the clinic had complied with core Massachusetts Medicaid requirements" that the counselor had specialized training and experience and possessed qualifications for his or her job.  Op. at 11.  Because the payment codes and NPI information on Universal Health Services' claims had provided this information to Medicaid, when, in fact, it did not meet these core Medicaid requirements, its claims constituted misrepresentations.

It is not yet clear when it will (and will not) be the case that a "defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths."  Justice Thomas seems to adopt a kind of reasonable person standard – if "anyone" looking at the information provided to the government on a claim form would conclude that the services described had been provided in compliance with a particular requirement, when, in fact, the defendant had not complied with that requirement, the claim form would contain a "half-truth."  However, a reasonable person considering a claim form that reported that the claimant had provided, for example, six hours of home health aide services to a patient, might reach no conclusion at all about the claimant's compliance with federal regulatory requirements that a home health agency have personnel practices supported by appropriate, written personnel policies, or about compliance with a panoply of other applicable regulations.  Given the myriad and complex regulations that apply to health care providers, the task of discerning whether undisclosed non-compliance with a particular regulation converts specifications on a claim form into "half-truths" will be fraught with uncertainty, particularly in the current absence of judicial guidance through this new legal framework.

Express Designation of a Statutory, Regulatory, or Contractual Provision as a Condition of Payment Is Not Dispositive of Whether Non-Compliance May Create Liability

While the reach of the Court's "half-truth" standard is not yet clear, the Court is clear that whether or not a provision is – by its own terms – an express condition of payment does not determine whether failure to comply with the provision may trigger liability.  Justice Thomas finds nothing in the text of the FCA or in the common law "tether[s] liability to violating an express condition of payment."  Op. at 12.  Rather, based on common law principles of fraud, Justice Thomas held, "[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."  Id.

Justice Thomas further explained that the express condition of payment standard could lead to undesirable results: "The Government might respond by designating every legal requirement as an express condition of payment.   But billing parties are often subject to thousands of complex statutory and regulatory provisions."  Op. at 13.  In fact, some state governments have adopted precisely the approach with which Justice Thomas is concerned, i.e., promulgating regulations that baldly state that every condition of participation is also a condition of payment.  Presumably, under the Court's opinion, both the "half-truth" standard – requiring that a reasonable person be misled about a claimant's undisclosed non-compliance with a statutory, regulatory, or contractual provision, relative to the specific representations on a claim form – and the "rigorous" materiality standard it imposes, discussed further below, would work together to limit the scope of non-compliance that could trigger FCA liability.

The Court Emphasizes the Rigor of the Materiality Standard

Justice Thomas explains that "[u]nder any understanding of the concept, materiality 'look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation."  Op. at 14.  In the Court's view:

The materiality standard is demanding.  The False Claims Act is not an all-purpose antifraud statute, or a vehicle for punishing garden-variety breaches of contract or regulatory violations.  A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.  Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant's noncompliance.  Materiality, in addition, cannot be found where noncompliance is minor or insubstantial.  Op. at 16-17 (internal citations and quotations omitted).

The Court then points to several factors that may be relevant to, but not dispositive of, materiality: (1) the Government's decision to expressly identify a provision as a condition of payment; (2) evidence that the defendant knows the Government consistently refuses to pay claims based on noncompliance with a particular requirement; (3) the Government's decision to pay a particular claim despite its actual knowledge that certain requirements were violated; and (4) the Government's regular payment of a particular type of claim despite actual knowledge that certain requirements were violated.

The Court's inclusion of the last two of these factors signals an important and apparent rejection of prior court decisions finding non-compliance to be "material" if the non-compliance had a mere tendency to influence the government's decision to pay a claim, even, in some cases, where the government had paid claims despite its awareness of the regulatory non-compliance at issue.  The Court's emphasis on a "rigorous" and "demanding" materiality standard may be particularly useful in the health care context, where the government and its contractors often pay claims despite their awareness of the claimant's technical or marginal non-compliance with legal requirements.

Justice Thomas also explicitly rejected Universal Health Services' "assertion that materiality is too fact intensive for courts to dismiss FCA cases on a motion to dismiss or at summary judgment."  Op. at 16-17, footnote 6.  Justice Thomas explained that "[t]he standard for materiality that we have outlined is a familiar and rigorous one" and that "False Claims Act plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality."  Id.  This comment is important, as courts have not consistently applied the high standard that plaintiffs must plead FCA violations with particularity, including the materiality element of an FCA violation.  It is further unclear how, if at all, courts will respond to this comment in practice, as well as how defendants could respond effectively to materiality allegations at the motion to dismiss stage.

Implications of the Court's Decision

By rejecting the express designation of a condition of payment as a gatekeeper for FCA liability under the implied certification theory, circumscribing its acceptance of the theory to circumstances in which a failure to disclose non-compliance renders a specific representation in a claim a "half-truth", and emphasizing a rigorous standard of materiality that is substantially more demanding than the standard previously imposed by most courts, the Court's opinion significantly upsets much of the prior body of FCA jurisprudence.  Ultimately, the lower courts' interpretation and application of the standards embodied in Escobar will determine whether the decision has the effect of expanding or contracting the scope of FCA liability.  However, the Court's rejection of the express condition of payment standard opens the door to expanded liability and is, in any case, unsettling.  In the immediate term, those operating in highly regulated industries such as health care are left with little guidance as to the types of non-compliance that may subject them to FCA liability, making it very difficult to effectively respond to any potential non-compliance discovered within an organization.

It is not clear how – if at all – the Court's opinion relates to health care providers' statutory and regulatory obligations to report and return any funds received or retained under Medicare or Medicaid and to which the provider "is not entitled."  See 42 U.S.C. § 1320a-7k(d).  Are providers "entitled" to retain a payment received on the basis of a claim that misrepresented, by omission, compliance with regulatory provisions that are not express conditions of payment, but compliance with which may be "material" to the Government's decision to pay the claim?  As failures to return identified overpayments are actionable under the FCA, the implications of Escobar for the appropriate interpretation of this separate but related statute remain to be seen.

How can providers react?

In validating the implied theory of certification, Escobar ultimately raises more questions than it answers, especially as the lower courts apply the decision.  During this period of uncertainty and out of an abundance of caution, providers may wish to advise their employees that the potential scope of FCA liability has plausibly expanded to include conditions of Medicare and Medicaid participation.  Providers should also instruct that, under the test articulated in Escobar, almost any statement or omission relevant to a claim for payment carries the potential to render the claim impliedly false, and potentially to have overpayment implications.  Thus, it is imperative that each individual in the billing chain, from documentation, to coding, to billing, understand the importance of accurate reporting.  Similarly, providers may wish to review their policies to ensure they communicate the expanded liability risk and contain procedures to ensure the accuracy of reports across the entire spectrum from admission to discharge to billing.  In certain circumstances, providers may wish to revisit prior compliance instructions and training materials to determine whether they are still valid or should be updated in light of Escobar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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