Implied Certification and Materiality Under the Civil False Claims Act, by Joan Krause

On June 17, the Supreme Court unanimously decided Universal Health Services v. United States ex rel. Escobar (UHS), holding that FCA cases may be predicated on “implied certifications” of compliance as long as the defendant knowingly violates a requirement it knows is material to the government’s payment determination. Because the First Circuit applied an incorrectly broad interpretation of materiality, however, the Justices nonetheless vacated the appellate judgment and remanded. While both parties quickly claimed victory, in reality the decision is likely to satisfy no one and to raise as many questions as it answers.

The case was filed by the parents of a young woman who died after receiving Medicaid-covered mental health treatment from a Massachusetts clinic that failed to satisfy state licensing and supervision regulations. Her parents alleged that the clinic’s MassHealth claims were fraudulent because, by filing for payment, the clinic had implicitly represented that it was in compliance with all relevant state requirements. A district court dismissed the suit but the First Circuit reversed, taking a very broad view of the scope of implied certification. On appeal, UHS asked the Court to reject the implied certification theory, arguing that a failure to disclose noncompliance should not be considered fraudulent in the absence of an affirmative duty to disclose. Respondents, supported by the United States as amicus curiae, countered that a defendant who knowingly bills the government for services without disclosing a failure to meet material conditions has submitted a false claim. While few observers expected the Court to entirely abolish implied certification, at oral argument the Justices appeared deeply divided as to the scope of the theory and the source of any limiting principle.

The opinion by Justice Thomas is curious in many respects, not the least of which is the fact that the first fourteen pages read as a near-total rejection of UHS’s arguments, only for the last four pages to reverse and remand the case. The Court had little trouble rejecting the request to abolish implied certification, holding that omissions may give rise to liability “when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose . . . noncompliance with a statutory, regulatory, or contractual requirement.” The Justices also had little trouble disposing of the argument that the theory should be applicable only to expressly designated conditions of payment. Justice Thomas noted that such a rule would be both over- and underinclusive: for example, it could allow providers to escape liability for violations that, while perhaps not grounds for denying payment, might have prevented Medicaid participation in the first place. Conversely, the government could respond to such a rule by explicitly designating all underlying provisions as conditions of payment, creating the very type of unlimited liability Petitioners feared.

When Justice Thomas noted that the defendant’s misrepresentation must be “material” to the government’s payment decision, UHS might have assumed the case was lost. Unlike circuits that apply a payment precondition rule, those circuits that rely on “materiality” to define actionable FCA misrepresentations have applied the test in an extremely government and relator-friendly fashion. After the enactment of FERA in 2009, the FCA contains a definition of materiality that applies to the false records and reverse false claims provisions: “having a natural tendency to influence, or be capable of influencing” the payment decision. Yet the Justices explicitly declined to apply that definition to the false claims provision at issue in the case, noting instead that the FERA definition was similar to those found at common law.   Rather than resolving the debate over whether FCA materiality is governed by the tort definition of fraud or the contract law distinction between material and non-material contract terms, the Justices found those formulations to be “substantially similar.” According to Justice Thomas, all of these approaches focus on the effect of the misrepresentation on the other party (here, the government), requiring either that a reasonable person would find the misrepresentation important or that the defendant know the government specifically does so.

At this point the opinion shifted significantly, and surprisingly, in favor of UHS. Rather than adopt the government’s view that any violation is material as “long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation,” Justice Thomas emphasized that the materiality standard is “demanding” and offered a litany of examples: Minor or insubstantial noncompliance is not material. A misrepresentation is not automatically material just because the government has designated the provision as a condition of payment, or would have had the option not to pay if aware of the noncompliance (although those considerations certainly are relevant). The government’s decision to pay a claim despite knowing of the violation (either in this or similar cases) is strong evidence against materiality. Instead of choosing from among the existing appellate tests, the Court’s approach echoed the short-lived pre-FERA debate over whether FCA materiality should be based on the defendant’s representation of its “claim of right” or on whether the misrepresentation had actually affected the government’s decision, a debate largely resolved by the assumption that FERA had adopted the lower threshold. In essence, the Court revived the outcome-based approach, setting a higher but more fact-intensive bar.

So who won the case? Everyone, and no one. While it comes as little surprise that the implied certification theory survived, on remand the relators will be forced to litigate under a far more demanding materiality standard than the First Circuit previously applied. In that litigation, the fact that Massachusetts regulators imposed fairly minimal penalties on the UHS providers – and did not suspend MassHealth payments – may loom large. UHS failed to convince the Court either to reject implied certification or to impose an explicit precondition-to-payment test, yet secured a materiality standard with considerably more “bite” than might have been assumed. And because materiality can no longer be determined solely by looking to the wording of the statute or regulations, courts will be required to engage in more detailed scrutiny of the government’s actual claims procedures; this may mitigate the possibility that the Department of Justice can substitute its own view of materiality for that of the regulatory agency, although the potential remains for differing interpretations.

Ultimately, the decision is unlikely to stem the relentless tide driving these cases toward settlement. While Justice Thomas denied that materiality is too fact-intensive to be addressed at the motion to dismiss or summary judgment stage, many cases may well require further development of the record. Moreover, the looming increase in FCA statutory penalties required by the Bipartisan Budget Act of 2015 – soon to be $10,781 to $21,563 per claim (compared to the current $5,500 to $11,000) – will leave many providers understandably hesitant to press their luck at trial. Perhaps the final winner, then, is the government, which will continue to reap the benefits of massive health care FCA settlements.

 

Picture: By U.S. government. [Public domain], via Wikimedia Commons

 

Professor Joan H. Krause