The U.S. Supreme Court on Thursday limited the reach of the False Claims Act in a mixed ruling for healthcare organizations.
The case, Universal Health Services v. Escobar, focuses on the implied certification theory of False Claims Act liability. According to this theory, when a healthcare provider submits a claim for payment, it impliedly certifies compliance with all conditions of payment. However, if the provider was in violation of a material statutory, regulatory or contractual requirement at the time of submission, the claim is rendered false or fraudulent. The theory allows whistle-blowers to base their qui tam actions on statutes and regulations outside of the False Claims Act and permits cases to be brought even when payment requests contain no false information.
Here are nine things to know about the case and the Supreme Court's decision.
1. In Escobar, the whistle-blowers alleged Arbour Counseling Services in Lawrence, Mass., which is owned by King of Prussia, Pa.-based Universal Health Services, was not in compliance with several Massachusetts regulations, making its requests for reimbursement under the federal-state Medicaid program fraudulent.
2. At the district court level, UHS' motion to dismiss was granted. The court reasoned that the state regulations UHS had violated were not "preconditions to payment." However, the U.S. Court of Appeals for the First Circuit disagreed and reversed and remanded the case. The Supreme Court agreed to review the case in December.
3. On Thursday, the high court generally upheld the viability of the implied certification theory. The court also imposed limitations on when liability under the False Claims Act is triggered. First, for liability to be imposed, the claims must make a request for payment and also make specific representations about the goods or services provided. Second, the defendant's failure to disclose noncompliance with material statutory, regulatory or contractual requirements would make those representations half-truths.
4. Writing for the high court, Justice Clarence Thomas noted the materiality standard is "demanding." Justice Thomas continued, "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." Materiality is also not established just because the government would have the option to decline to pay if it knew of the noncompliance or when noncompliance is "minor" or "insubstantial," according to Justice Thomas.
5. According to the court, proof of materiality can include, but is not limited to, evidence showing that a defendant knows that the government consistently refuses to pay claims based on similar noncompliance.
6. Commenting on the Supreme Court's decision, Jessica L. Ellsworth, partner at Hogan Lovells, says the limitations demonstrated that the high court "fully understood that the False Claims Act remains about fraudulent conduct — not garden variety foot-faults that a regulated party may experience in complying with complex regulatory and statutory obligations."
7. The whistle-blowers in Escobar are the parents of a teenage girl who died in 2009 after having an adverse reaction to anti-seizure medication prescribed by an Arbour Counseling employee. Their daughter was a beneficiary of the Massachusetts Medicaid program. A subsequent investigation revealed Arbour Counseling was not in compliance with several Massachusetts regulations related to licensure and supervision in the course of the teenager's treatment.
8. The girl's parents filed a lawsuit against UHS, alleging any claims for payments arising from their daughter's treatment were false because UHS knew it was not in compliance with Massachusetts regulations when the claims were submitted.
9. The Supreme Court vacated judgement and remanded the case to the lower court to determine if UHS violated the False Claims Act using the approach set out by the high court.
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