In a unanimous decision issued on June 16, 2016, in Universal Health Inc. v. U.S. et al. ex rel. Escobar et al. the United States Supreme Court resolved a circuit split and held that an “implied certification” theory can provide the basis for False Claims Act (“FCA”) liability. The Court also held that the regulatory compliance impliedly certified to by the provider must be “material” to the government’s decision to pay and not “insubstantial.” Although the decision could be viewed as a victory for the government and potential relators, it may give healthcare providers additional arguments as well.
Under an implied certification theory, a claim can be deemed false based on an implied representation that the provider who submitted it is in compliance with statutes, regulations or contract provisions. Some courts have distinguished between non-compliance with statutes, regulations, or contract provisions that constituted “conditions of payment” by governmental payors like Medicare, and those that were “conditions of participation.” Some courts have also divided the category of “conditions of payment” into conditions that can be either express or implied.
In the First Circuit Court of Appeals decision considered by the Supreme Court in Universal Health, the First Circuit bought into the theory, and held actionable FCA claims that are based on either express or implied conditions of payment. The First Circuit further held that the Medicare regulations at issue (dealing with adequate supervision of staff who provide mental health counseling) were express conditions of payment and as such, constituted “dispositive” evidence that the FCA element of materiality was met in the case. The Supreme Court accepted the case to resolve a split among circuits: the Seventh Circuit and other courts had rejected the theory of implied certification altogether; the Second Circuit and others had imposed limited liability based upon implied certification theories only with regards to violations of express conditions of payment; and the First Circuit and others allowed liability based on implied representations concerning regulations that were either implied or express conditions of payment.
The Supreme Court held that as an initial matter, FCA liability may be premised on a theory that by submitting a claim, the provider made an implied certification of compliance with all laws, regulations, and contract provisions. The Court found that when “a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.” That said, however, the Court moved on to “[t]he second question presented [of] whether, as Universal Health urges, a defendant should face False Claims Act liability only if it fails to disclose the violation of a contractual, statutory, or regulatory provision that the Government expressly designated a condition of payment.” The Court concluded “that the Act does not impose this limit on liability . . . [b]ut we also conclude that not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.” Even more helpfully to providers, the Court noted that the materiality standard for implied certification cases should be considered “rigorous” and “demanding,” and the theory should not be used to pursue “garden variety” compliance issues.
Overview: Universal Health Inc. v. U.S. et al. ex rel. Escobar et al.
Facts: Yarushka Rivera, a teenage beneficiary of the Massachussetts Medicaid Progam, died in 2009 after suffering an adverse drug reaction and seizure. Rivera had been diagnosed with bipolar disorder and had received counseling services for five years from a mental health facility owned and operated by a subsidiary of Universal Health. The medication prescribed for Rivera was ordered by facility employees, many of whom were discovered to be unlicensed to provide mental health counseling and were not authorized to prescribe medications under state law.
The Implied Certification Theory: Respondents filed a qui tam suit alleging Universal Health violated the FCA and defrauded the government by submitting claims for reimbursement while in serious violation of Massachusetts Medicaid laws. By submitting claims for payment, Universal Health knowingly misrepresented its compliance with mental health facility regulations requiring individual practitioners to treat patients and prescribe medications only as permitted by state law. Although these rules are not strictly defined by Massachusetts Medicaid as “conditions of payment,” the Respondents argued that these rules are so central to the provision of mental health counseling that the program would have refused to pay the claims had it been aware of the violations.
Holding: In a unanimous opinion, the Supreme Court held, “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 noncompliance with material statutory, regulatory, or contractual requirements that make those representations misleading with respect to those goods or services.” The court further held that FCA “liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment.”
Questions and Takeaways
1. “Materiality” is the new standard for FCA violations brought under the implied certification theory.
Under Universal Health, to support an implied certification theory, the government must prove a “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements.” The “materiality” of the compliance issue determines whether a provider may be faced with FCA exposure. Whether a particular law, regulation, or rule is characterized as a “condition of payment,” condition of participation, enrollment requirement or something else does not control the determination of materiality. The question is whether the law, regulation or rule would be “material” to the government’s decision to pay.
2. What is considered “material?”
The FCA defines “material” to mean “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”
The Supreme Court explained that a misrepresentation of compliance is only material if it would have the effect of “inducing” the government to make payment. If the government would issue payment regardless of whether the provider has complied with the rule or requirement at issue, then it would not be considered “material” for purposes of substantiating an FCA violation.
The Court characterized this new standard as “demanding,” noting the FCA is not a “vehicle for punishing garden-variety breaches of contract or regulatory violations” and should not be invoked where “noncompliance is minor or insubstantial.”
A rule is not necessarily “material” under the FCA simply because the government has characterized it as a “condition of payment.” What matters is not the label attached by the government, but whether the provider knowingly violated a requirement the provider knows is material to the government’s payment decision.
3. When does a claim contain a misrepresentation?
The Supreme Court found that the facts in Universal Health presented a strong case for FCA liability because the compliance violations were so significant that the information reported on the claim form misrepresented the services actually provided and was therefore false.
Universal Health reported codes for services such as individual therapy, family therapy, preventive medication counseling, and other types of treatment by different categories of mental health providers. By reporting these codes and identifying NPI numbers of providers, the provider clearly misled the Medicaid program. Medicaid would have assumed from the claim form that the individual counseling services were furnished by licensed and qualified individuals, as required by Massachusetts law. At a minimum, one would have assumed that the individuals prescribing controlled substances possessed the qualifications to do so. By using payment and other codes that conveyed this information without disclosing the provider’s many violations of basic staff and licensing requirements for mental health facilities, the Supreme Court found that Universal Health’s claims were fraudulent misrepresentations.
4. How does the FCA’s intent requirement apply?
The FCA still has a scienter requirement. A defendant must act “knowingly” to violate the FCA. “Knowingly” is defined as “actual knowledge of the information,” “deliberate ignorance of the truth or falsity of the information,” or “reckless disregard of the truth or falsity of the information.”
When applied to the implied certification theory, the Court explained the scienter requirement means the provider must have “actual knowledge” that a rule or regulation is material to the government’s payment decision. Notably, the Court did not explain how providers might know whether a rule or regulation is material to government’s payment decision, but directed providers to consider whether the government has previously denied claims based on such noncompliance.
5. Whether a rule or regulation is a “condition of payment” is not determinative.
Under Universal Health, the application of the implied certification theory “does not turn upon whether those requirements were expressly designated as conditions of payment.” Even when a rule or regulation is expressly designated or characterized as a condition of payment, not every violation of such a requirement gives rise to FCA liability. The language used by the government to characterize requirements is not dispositive; the focus is instead on whether the defendant knowingly violated a requirement the defendant knew was material to the government’s payment decision.
6. How will this play out?
The Universal Health ruling will likely give both plaintiffs and defendants additional arguments in FCA cases. The government and relators may bring more cases based on implied certification theories. On the other hand, provider defendants will have additional arguments that even in cases in which the regulations allegedly violated were clearly conditions of payment, the failure to reveal the non-compliance when submitting the claim was nevertheless immaterial. In the future, we also anticipate that courts and parties will struggle with issues of proof on the materiality element and at what stage of the case (motions to dismiss, summary judgment, or trial) the materiality issue should appropriately be resolved.
