Implied Certification, Escobar, and the Impact on Healthcare Providers
On June 16, 2016, the Supreme Court issued a unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar upholding the “implied certification” theory of liability under the False Claims Act (“FCA”) but adopting a rigorous materiality standard for determining liability in such cases. This case is a game changer. For years, the government and plaintiffs have argued that the federal FCA can be violated if a hospital or other provider or supplier (“Provider”) submitted a claim when the Provider did not meet all compliance standards associated with that claim. This has been known as the “implied certification” theory of liability; that Providers were impliedly certifying to compliance with laws associated with the claim when it was submitted. The circuit courts across the county have been split on whether to recognize the implied certification theory, and if so, what the test should be for applying the theory under the FCA. The Supreme Court has finally resolved this uncertainty. But, what does Escobar mean for Providers? While the Supreme Court’s recent pronouncement upholds the theory, it narrows its application with a new demanding standard which will offer Providers an additional defense in FCA cases going forward. It remains to be seen whether the number of FCA cases based on the implied certification theory will increase after Escobar, whether lower courts will dispose of more of these cases on summary judgment using the new test developed by the Supreme Court, and whether the Legislature will respond with statutory changes to broaden the application of the implied certification theory in favor of the government.
Implied Certification Theory
The FCA imposes liability on anyone who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the federal government. The FCA also punishes whoever knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.
The statute does not, however, provide a definition of a “false” or “fraudulent” claim. As a result, courts have struggled with how to define the FCA’s reach in determining what constitutes a false or fraudulent claim. One theory that has been adopted by some courts is the implied certification theory. Under the implied certification theory, a claim can be deemed false for purposes of liability under the FCA based on an implied representation that the provider or supplier who submitted the claim is in compliance with all applicable statutes, regulations or government contract provisions. Given the tens of thousands of such requirements that apply to Providers, the scope of the implied certification theory has a considerable effect on organizations operating in the industry.
Prior to the Supreme Court addressing the issue of implied certification, the courts of appeals across the country were split on whether to recognize the theory, with at least one circuit rejecting the theory entirely. In the circuits that did recognize the theory, there was a split in its application, although many courts required that the violated statute, regulation, or contractual term be expressly designated as a “condition of payment” by the government. The Supreme Court’s ruling in Escobar resolved this split in the circuit courts, and provides a new standard that will apply in every jurisdiction.
Background of Case
In Escobar, a teenage beneficiary of Massachusetts’s Medicaid program received counseling services for several years at a mental health facility owned and operated by a subsidiary of Universal Health Services, Inc. The patient had an adverse reaction to a medication that a purported doctor at the facility prescribed. Her condition worsened, and she eventually died of a seizure. Her mother and stepfather (the plaintiffs in the case) later discovered that few facility employees were actually licensed to provide mental health counseling, or authorized to prescribe medications or offer counseling services without supervision. They then filed a qui tam suit in district court relying, in part, on an implied certification theory of liability under the FCA. Specifically, the suit argued that Universal’s submission of Medicaid claims performed by improperly licensed employees impliedly violated the government’s conditions of payment and the claims were therefore “false or fraudulent.” The First Circuit had previously recognized the implied certification theory of liability under the FCA. However, the district court granted Universal’s motion to dismiss, finding that none of the regulatory violations cited by the Plaintiffs were expressly listed in the law as “conditions of payment”.
The First Circuit reversed the district court’s narrow interpretation of the implied certification theory, finding that “any statutory, regulatory, or contractual violation is material so long as the defendant knows that the government would be entitled to refuse payment were it aware of the violation.” The First Circuit held the regulations at issue were “dispositive evidence of materiality” and therefore the lower court erred in dismissing the FCA cause of action.
Supreme Court Decision
The Supreme Court took up the case on appeal in order to resolve the disagreement among the Courts of Appeals across the country over the validity and scope of the implied certification theory. In its decision, the Supreme Court upheld the implied certification theory of liability under the FCA, finding that omissions that create a misleading representation give rise to FCA liability because of the FCA’s bar on “false or fraudulent” claims for payment or approval. The Court did, however, impose significant limitations on the availability of the theory, rejecting the government’s argument that a claim implicitly represents compliance with all statutory, regulatory, and contractual rules that could affect the claimant’s eligibility for payment.
The Supreme Court held that the implied certification theory can be the basis for FCA liability when a defendant submitting claims 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. The Supreme Court also specifically held that FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated in the law or under a contract as “conditions of payment”. Thus, while at the same time that the Supreme Court narrowed the application of the theory by requiring a claimant to make a specific representation about the goods or services and requiring that the failure to disclose the noncompliance be material, the Supreme Court also opened up the theory to any violation of law or contract—not just those that were violations of express “conditions of payment”.
Specific Representations and Failure to Disclose Noncompliance
The Supreme Court first addressed whether submitting a claim without disclosing violations of statutory, regulatory or contractual requirements could constitute an actionable misrepresentation. In analyzing the issue, the Supreme Court cited to a common-law rule that representations that state the truth only so far as it goes, while omitting critical qualifying information, can be actionable misrepresentations. Such representations are referred to in the opinion and prior cases as “half-truths”. Specifically, in this case, the Supreme Court found that by submitting claims for payment using payment codes that corresponded to specific counseling services, the facility had represented that the services had been provided in accordance with applicable law. The court also held that submitting Medicaid reimbursement claims using National Provider Identification numbers is equivalent to a representation that the services were provided by properly trained and licensed employees.
In addition, in order for liability to attach under the FCA, the misrepresentation must be material to the government’s decision to pay on the claim. In reviewing the meaning of “material” in both common-law and other federal statutes, the Supreme Court noted that under any understanding of the term, materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. The court identified a number of factors that may be relevant in assessing the existence of materiality. These factors include whether the provision is labeled a condition of payment (although this factor is not dispositive) and knowledge by the defendant that the government consistently refused to pay the type of claims in question based on noncompliance with the particular requirement at issue.
The Supreme Court called the materiality standard “rigorous” and “demanding,” finding that it is insufficient that the government merely would have had the option to decline payment had it known of noncompliance. It also emphasized that the FCA is not intended to punish “garden-variety breaches of contract or regulatory violations” or to impose “treble damages and other penalties for insignificant regulatory or contractual violations.”
Conditions of Payment
In focusing on whether or not the misrepresentation is material to the government’s payment decision, the Supreme Court rejected the bright-line distinction used in some of the circuit courts between conditions of payment and other statutory, regulatory and contractual requirements. Ultimately, 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.
Because the Supreme Court disagreed with the standard applied by the First Circuit in assessing the complaint, the case was remanded for reconsideration based on the materiality standard set forth in the Supreme Court’s opinion.
Impact on Providers
The ruling will have an enormous impact on Providers. Providers submit large volumes of claims every day to the government for payment through their participation in Medicare and other federal healthcare programs. These programs include some of the most complex regulatory requirements of any industry. Combined with the financial rewards available to whistleblowers and the government’s continued focus on reducing fraud and abuse, the number of FCA cases filed against healthcare providers and suppliers has increased dramatically over the past two decades. In 2015, over 60% of FCA cases involved healthcare entities.
It remains to be seen what the long-term impact of the Supreme Court’s standard on materiality will be for Providers under the FCA. Prior to this case, a violation of a “condition of payment” was arguably a clear basis to assert FCA liability. Now, however, such a violation may not be a basis for liability under the materiality inquiry. The determination will depend on whether the Provider submitted a claim that makes specific representations about the goods or services provided and knowingly failed to disclose noncompliance with a material statutory, regulatory or contractual requirement that makes the specific representations misleading.
Concurrently, a violation of a “condition of participation” or other statutory, regulatory or contractual requirement, which previously was not generally considered the basis to assert FCA liability, now may be if the noncompliance is considered material under the Supreme Court’s standard. As a result, Providers may be subject to more qui tam litigation brought by plaintiffs who are emboldened to argue that even minor and seemingly unrelated violations are material to the claim for which payment was sought. That said, each case will require a fact-intensive inquiry, and the new demanding materiality standard may likely result in more cases being disposed of on summary judgment.
While the Escobar decision resolved a circuit split on the viability and application of the implied certification theory, disputes surrounding the meaning of “materiality” under the Supreme Court’s new guidelines may lead to further divergent lower court opinions, leading to continued uncertainty for Providers as to what constitutes a false claim. Given the potential draconian consequences of an FCA violation, such continued uncertainty is an unfortunate reality for Providers seeking to comply with the multitude of statutes, regulations and contractual requirements applicable to their operations.