On June 16th, 2016, the Supreme Court issued a unanimous opinion in Universal Health Services v.United States ex rel. Escobar upholding implied false certification in False Claims Act (“FCA”) cases. The Court, in an opinion authored by Justice Clarence Thomas, ruled in favor of whistleblowers who relied upon an implied certification theory to allege that Universal Health Services had submitted false Medicaid claims.
The decision was not a surprise to those following FCA litigation closely, but it contains significant limitations on the use of the implied false certification theory, that may narrow providers’ exposure to FCA liability for regulatory violations. We describe the key points of the Court’s decision below and offer some thoughts on how it affects—and does not affect—provider compliance analysis in the context of Stark law and 60-day repayment rule.
In brief, the Court established a rigorous standard for determining when non-compliance with a statutory, regulatory, or contractual requirement will be sufficiently material to constitute a misrepresentation that can support a FCA claim under an implied certification theory. This standard may discourage plaintiffs’ attorneys, and perhaps the Government, from bringing FCA actions based upon technical violations of Medicare rules, thereby providing some relief to providers from the threat posed by the FCA’s draconian penalties.
The Escobar Factual Background
The relators in Escobar are the parents of a teen age girl who died following treatment at a mental health facility owned by the defendant, Universal Health Services in Lawrence, Massachusetts. The practitioner who prescribed medicine to the young girl was held out by the defendant as a psychiatrist but in fact was a nurse who lacked authority to prescribe medications absent supervision. Following investigation, it was determined that the qualifications and licensing status of many staff members at the facility were misrepresented in order to obtain individual NPI numbers, which were used to submit claims to Medicaid.
That the services were actually provided and billed correctly was not at issue; instead, the relators alleged that the claims were false because Universal had impliedly misrepresented that the services were provided by specific types of licensed professionals, and failed to disclose serious violations of licensing requirements. The District Court dismissed the case, holding that the relators had failed to state a claim because none of the regulations that Universal violated was a condition of payment. The Court of Appeals reversed, and the case was appealed to the Supreme Court, which granted certiorari.
Key Points in the Escobar Decision
The implied false certification theory is long-standing and is premised on the argument that by submitting a claim for payment, the provider impliedly certifies that it has complied with all of the rules applicable to that service. The courts of appeal have applied this theory differently, with the Seventh Circuit rejecting the theory altogether; other circuits limiting its application to rules identified as “conditions of payment” (as compared, for example, to conditions of participation); and still others applying it to all types of rules. Not surprisingly, the Government has argued for the most expansive interpretation: submission of a claim where there has been even the smallest failure to comply with the statute, rule, or contractual requirement, results in an implied false certification and FCA liability.
The Supreme Court concluded as follows:
- The implied certification theory is valid in some circumstances, but the validity of the claim does not depend on whether the noncompliance at issue is with a condition of payment.
- Instead, the validity of an implied certification claim depends on two conditions:
- the claim does not merely request payment, but also makes specific representations about the goods or services provided; and
- the failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those misrepresentations misleading half-truths.
- The Court set a high bar for materiality, emphasizing that “the materiality standard is demanding” and “rigorous;” goes “to the very essence of the bargain”; and cannot be found where non-compliance is “minor or insubstantial.”
Applying Escobar in the Context of the Stark Law
The Court’s rigorous standard for materiality raises interesting questions as to when non-compliance with the Stark law can support a whistleblower suit under the FCA. If ever there was a law with the capacity for non-material violations, it is the Stark law. While the recent amendments to the Stark self- referral regulations have diminished the potential for technical noncompliance, the Stark rules remain full of hidden “IEDs.” Consider the following:
- A missing signature to a contract that is obtained 90 days after the effective date is not a violation, but on the 91st day becomes a violation.
- An in-office ancillary service provided from an office that is open 35 hours per week may not be a violation, while the same service provided from an office open only 32 hours per week (four days) may be a violation.
- An amendment to a physician recruitment agreement that is made after the physician has relocated may convert the agreement to an unlawful retention agreement no matter how reasonable the change.
The Escobar decision might lead a provider to conclude that technical violations of the Stark law such as these are not material and do not raise FCA risk. Such a conclusion might affect a provider’s judgment on whether to make a self-disclosure to CMS (which can lead to a 3+ year settlement process). We doubt, however, that Stark law violations will ever be considered immaterial, given that Congress explicitly provided in the Stark law that “no payment may be made” for a claim submitted in violation of the statute. Consequently, providers need to continue to be concerned about the potential for Stark law-based whistleblower suits under the FCA premised on immaterial violations that do not involve ownership or compensation issues.
Escobar and the 60-Day Repayment Rule
Another interesting question raised by the Escobar decision is whether its heightened materiality standard extends to FCA claims based on a failure to repay an overpayment. The FCA makes it a false claim to knowingly and improperly avoid or decrease an obligation to pay or transmit money to the Government. The ACA’s 60-day repayment provision defines an overpayment retained after the 60-day repayment deadline to constitute an “obligation.” If a provider identifies a claim where there was “minor or insubstantial” noncompliance with a regulatory requirement, but nevertheless the requirement has been identified by CMS as a condition of payment, does a failure to report and repay the claim result in an independent basis for liability under the FCA, even though the initial submission of the claim would not have been a material misrepresentation?
This esoteric question might be answered by a court someday, but the important point for now is that providers should not take too much comfort in the Escobar decision. The case will be useful to those who unfortunately find themselves defending a FCA claim in court, bu t it does little to change the imperative for self-disclosure to avoid liability under the 60-day repayment rule.
This memorandum is for informational purposes and is not intended as legal advice. No legal or business decision should be based on its content. If you have any questions about the subject of this memorandum, please contact Mark Fitzgerald at (202)872-6771, Mark.Fitzgerald@ppsv.com or the attorney at Powers with whom you work regularly.