A unanimous Supreme Court issued its long-awaited and closely watched decision today on the scope of the False Claims Act (“FCA”), and the Court affirmed the FCA’s long reach. Universal Health Services, Inc. v. United States ex rel. Escobar et al., No 15-7.  The decision has momentous implications for health care providers and suppliers, and other entities, who seek or cause others to seek Medicare and Medicaid reimbursement.

In the Escobar case, Yarushka Rivera, a teenage beneficiary of Massachusetts’ Medicaid program, received counseling services for several years at Arbour Counseling Services. She had an adverse reaction to medication prescribed to her at Arbour and later died. Her mother and stepfather discovered that some of the employees who provided counseling services and prescribed the medication to Ms. Rivera were not licensed to provide mental health counseling, or authorized to prescribe medications or offer counseling services without supervision. Massachusetts Medicaid imposes such licensing and authorization requirements.

The plaintiffs brought an FCA case alleging that defendant submitted Medicaid reimbursement claims representing that mental health service were provided by licensed individuals but they were not, and that Massachusetts Medicaid was unaware of the deficiencies when it paid the claims. Thus the claims were false through a theory of “implied certification.”

What is implied certification, and why does the Court’s decision matter?

As is well known, the FCA is a punitive statute that imposes treble damages as well as per-claim penalties. The statute is frequently used by the government and qui tam relators to bring claims against entities in the health care industry, and FCA cases have resulted in enormous penalties.  The scope of what constitutes a “false” claim—and thus the reach of the statute—has been the subject of a long dispute and resulted in a split among the Circuit Courts of Appeal. Specifically, many FCA cases rely on “implied certification,” a theory that the Supreme Court described as follows: “when a defendant submits a claim, it impliedly certifies compliance with all condi­tions of payment. But if that claim fails to disclose the defendant’s violation of a material statutory, regulatory, or contractual requirement, so the theory goes, the de­fendant has made a misrepresentation that renders the claim “false or fraudulent” under §3729(a)(1)(A).”

Given the myriad statutes, regulations, sub-regulatory guidance, and contracts that govern the operations of entities in the health care industry, the failure to comply with any one of these provisions when providing any item or service payable by Medicare or Medicaid could make the claim for payment “false,” thus subject to enormous FCA penalties.

What did the Court decide?

There are two parts to the Court’s decision today. First, the Court accepted implied certification and decided that “at least in certain circumstances,” the implied false certification theory can be a basis for liabil­ity. The Court explained that “liability can attach when the defendant submits a claim for payment that makes specific represen­tations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.”

Second, the Court used the FCA’s “materiality” standard to impose some limitations on the FCA’s scope. The Court explained that the “materiality standard is demanding,” and it rejected the government’s “extraordinarily expansive view of [FCA] liability” under which there could be FCA liability anytime the government was entitled to refuse payment.  The Court also rejected the bright-line rule that only an “express condition of payment” can provide the basis for liability, which providers and contractors argued was necessary to be certain that they have fair notice in advance of what is material.

Instead, that Court decided that “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.”  Thus a provider must “knowingly” violate a requirement and “know” it is material to the federal payment. The Court decided that it does not matter if the legal requirements are expressly designated as conditions of payment.

Finally, the Supreme Court reiterated that the standard for materiality is rigorous and that 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.”

Conclusion

The Supreme Court’s decision has many aspects to digest