On May 1, 2017, the US Court of Appeals for the Third Circuit affirmed the dismissal of United States ex rel. Petratos, et al. v. Genentech, Inc., et al., No. 15-3801 (3d. Cir. May 1, 2017). On appeal from the US District Court for the District of New Jersey, the Third Circuit reinforced the applicability of the materiality standard set forth by the US Supreme Court in Universal Health Services v. Escobar. Per the Court, the relator’s claims implicate “three interlocking federal schemes:” the False Claims Act (FCA), Medicare reimbursement, and US Food and Drug Administration (FDA) approval.

The relator, Gerasimos Petratos, was the former head of health care data analytics at Genentech.  He alleged that Genentech suppressed data related to the cancer drug Avastin, thereby causing physicians to certify incorrectly that the drug was “reasonable and necessary” for certain Medicare patients. This standard is drawn from Medicare’s statutory framework: “no payment may be made” for items and services that “are not reasonable and necessary for the diagnosis and treatment of illness or injury.” 42 U.S.C. § 1395y(a)(1)(A) (emphasis added).  In turn, the Centers for Medicare and Medicaid Services (CMS) consider whether a drug has received FDA approval in determining, for its part, whether a drug is “reasonable and necessary.” Petratos claimed that Genentech “ignored and suppressed data that would have shown that Avastin’s side effects for certain patients were more common and severe than reported.” Petratos further asserted that analyses of these data would have required the company to file adverse-event reports with the FDA and could have triggered the need to change Avastin’s FDA label.

On Genentech’s motion to dismiss, the District Court disposed of the case on the basis of relator’s failure to satisfy the “falsity” element of a FCA claim. The lower court’s decision was based on a determination that “medically ‘reasonable and necessary’ is a determination made by the relevant agency, not individual doctors.” The District Court reasoned that because Avastin was approved for cancer treatment by the FDA and was certified as reimbursable under Medicare by CMS, physicians’ prescriptions of the drug to cancer patients was “‘reasonable and necessary’ as a matter of law” and, therefore, could not result in “false” claims. The relator appealed to the Third Circuit, where the United States (joined by 26 states and the District of Columbia) filed an amicus brief in support of neither party.

The Third Circuit affirmed on the alternative grounds that Petratos failed to satisfy the FCA’s materiality standard. The Third Circuit disagreed with the District Court’s assessment that dismissal was based on the binary “false choice” between whether medically “reasonable and necessary” is assessed by physicians or defined by the regulatory scheme. Instead, the Third Circuit determined that a “reasonable and necessary” determination is a complex process involving the FDA, CMS and individual physicians. The Third Circuit based its decision on two conclusions: (1) the FDA and CMS “are best positioned to make high-level policy decisions—such as issuing national coverage determinations and drug approvals;” and (2) citing the Medicare Benefit Policy Manual, physicians are “best suited to evaluate each patient and determine whether a treatment is ‘reasonable and necessary for [that] individual patient.’”

Based on this assessment, the Third Circuit unanimously held that Petratos’s allegations did not meet the FCA’s materiality standard. Citing to the District Court decision below, the Third Circuit noted that “there are no factual allegations showing that CMS would not have reimbursed these claims had these [alleged reporting] deficiencies been cured.” Ultimately, it was the relator’s failure to challenge this finding that proved fatal to his FCA claims. The Third Circuit did not mince words in concluding that “Petratos does not dispute this finding, which dooms his case.” The Court went on to note that, “[s]imply put, a misrepresentation is not ‘material to the Government’s payment decision,’ when the relator concedes that the government would have paid the claims with the full knowledge of the alleged noncompliance.”

The Third Circuit’s decision underscores what many courts, including the US Supreme Court, have held: that a nexus to the government’s ultimate payment decision is the linchpin of materiality under the FCA.