In U.S. ex rel. Poehling v. UnitedHealth Group, Inc., the U.S. District Court for the Central District of California partially granted UnitedHealth’s motion to dismiss the government’s FCA claims, which were based on the allegation that UnitedHealth’s attestations as to the truth and accuracy of the risk adjustment data submitted were false because the district court found that the government had failed to plead the attestations were material to the payment decision, as required by the Supreme Court’s decision in Escobar. The district court declined to dismiss the remaining claims, including an FCA claim added by the government after its complaint in the similar Swoben case was dismissed (which we discussed here), which alleged a violation of the reverse false claims provisions due to failure to delete invalid diagnosis codes without reference to the attestation. The district court did grant the government leave to amend, with the second amended complaint to be filed by February 26, 2018.
The U.S. Court of Appeals for the Fifth Circuit vacated a $663 million judgment, concluding that the Supreme Court’s opinion in Escobar doomed the plaintiff’s FCA claims on the issue of materiality.
FCA Allegations: Highway Guardrail Systems Had Unapproved Design Modifications
Trinity Industries, a manufacturer of highway guardrail systems, faced FCA allegations brought by a former competitor based on the theory that federally subsidized purchases of Trinity’s guardrail systems resulted in false claims as a result of unapproved design modifications. Prior to the filing of the relator’s qui tam lawsuit, the relator met extensively with Federal Highway Administration (FHWA) officials during which he presented his allegations regarding the design modifications and his assertions that those modifications rendered Trinity’s guardrail systems ineligible for federal reimbursement. FHWA met separately with Trinity to discuss the relator’s allegations. Following those meetings, FHWA confirmed that state purchases of the Trinity guardrail system were eligible for federal reimbursement notwithstanding the design modifications.
The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we will take a closer look at recent legal developments involving the FCA. This week, we examine the Supreme Court’s opinion in Escobar and its impact on the question of the FCA’s materiality requirement.
In addition to tackling the viability of the implied certification theory of liability in Escobar, the Supreme Court also held that the FCA does not restrict liability to noncompliance with express conditions of payment, stating that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.” The Supreme Court explained that any concerns about fair notice or open-ended liability without such a restriction on liability can be addressed through “strict enforcement” of the FCA’s “demanding” and “rigorous” materiality requirement, as well as the FCA’s scienter requirement.
U.S. ex rel. Badr v. Triple Canopy, Inc., an intervened case arising out of the Fourth Circuit, has been one of the more closely-watched recent FCA cases. Previously, the Fourth Circuit held that the government’s complaint properly alleged an FCA claim and could survive Triple Canopy’s motion to dismiss. That ruling was subsequently vacated by the Supreme Court following its decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, which we covered here and here. On May 16, 2017, the Fourth Circuit issued its opinion on remand, finding that the complaint satisfied the pleading standards set forth in Escobar and re-affirming its conclusion that the complaint adequately stated an FCA claim.
In June, the Supreme Court issued Universal Health Services, Inc. v. U.S. ex rel. Escobar, a landmark opinion in which the Supreme Court addressed the standard for pleading materiality in FCA implied certification cases. The Supreme Court ultimately remanded the case to the First Circuit to resolve in the first instance whether the alleged violations met that standard, and last week, the First Circuit gave its answer: the violations were material.
The United State District Court for the Eastern District of New York recently dismissed an FCA complaint for failing to plead materiality under the standard announced in Universal Health Services, Inc. v. U.S. ex rel. Escobar, the Supreme Court’s landmark FCA opinion issued in June of this year. The case, U.S. ex rel. Lee v. Northern Adult Daily Health Care Center, 13-cv-4933, 2016 WL 4703653 (E.D.N.Y. Sept. 7, 2016), becomes one of the first to substantively apply Escobar and highlights the barrier the FCA’s materiality requirement poses to FCA relators in the wake of the Supreme Court’s ruling. It also suggests ways in which courts already are divided in their interpretation of Escobar.
On August 12, 2016, the U.S. Court of Appeals for the Eighth Circuit affirmed summary judgment with respect to FCA claims asserted against an anesthesia practice based on the theory that the practice’s physicians billed Medicare for anesthesia services without being present in the operating room during the patients’ “emergence” from anesthesia. In U.S. ex rel. Donegan v. Anesthesia Associates of Kansas City, PC, the Eight Circuit concluded that the relator failed to establish that the practice acted with the requisite knowledge because the practice’s interpretation of the billing regulation at issue was “objectively reasonable.”
On June 16, 2016, the U.S. Supreme Court issued its much-anticipated opinion in Universal Health Services, Inc. v. United States ex rel. Escobar regarding the implied certification theory of False Claims Act (FCA) liability. The Court’s unanimous opinion, drafted by Justice Clarence Thomas, is significant in three respects, detailed further below: (1) the Court ruled that, in certain circumstances, the implied certification theory can be a basis for FCA liability; (2) the Court held that an express condition of payment in a statutory, regulatory or contractual requirement is relevant—but “not automatically dispositive”—in determining FCA liability; and (3) the Court clarified how the FCA’s materiality requirement should be enforced by lower courts addressing FCA suits premised on an implied false certification theory.
The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we will take a closer look at recent legal developments involving the FCA. This week, we examine the requirement that the conduct alleged to have resulted in a false claim must be material to the government’s decision to pay that claim and how courts have evaluated this issue in recent cases.
FCA claims should fail when the regulations allegedly violated are immaterial to the government’s decision to pay a claim. Where the theory of FCA liability turns on compliance with statutes and regulations in the healthcare context, courts continue to distinguish between regulations that are conditions of participation in the federal healthcare program and regulations that are conditions of payment, holding only violations of the latter can underpin FCA liability. As the Sixth Circuit has explained, violations of condition of participation are best addressed through administrative sanctions, not the “extraordinary remedies” of the FCA. See U.S. ex rel. Hobbs v. MedQuest Assocs., 711 F.3d 707 (6th Cir. 2013).
In U.S. ex rel. Petratos v. Genentech, Inc., the U.S. District Court for the District of New Jersey dismissed a qui tam action claiming that Genentech underreported side effects of the widely-used cancer drug Avastin. In its opinion, the district court reiterated that the FCA is not intended to reach wrongful behavior that does not lead to a false claim or regulatory violations not tied to payment.
Relator’s complaint alleged that defendants made false submissions to the FDA by relying on patient databases that contained inadequate information about drug risks and side effects and otherwise refused to provide data regarding such risks to a Key Opinion Leader based upon defendants’ false assertion that this information was unavailable. The relator claimed that this conduct cost taxpayers “hundreds of millions of dollars,” because fewer doctors would have prescribed Avastin if defendants had provided complete and accurate information, and government payers would have reimbursed for fewer Avastin indications, for lower dosages, or not at all.