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Escobar case limits False Claims Act liability for providers

July 18, 2017

Health care providers, as government contractors, must make certain representations of fact when submitting claims for government program reimbursement, such as Medicare. Sometimes through no fault of the contractor, such representations may not be wholly accurate, giving rise to theoretical liability under the False Claims Act. The interests of such health care providers are impacted by the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).

In Escobar, the Supreme Court first recognized the “implied false certification” theory of liability, which states that when a defendant submits a claim for payment to the government, it impliedly certifies compliance with all conditions of payment. However, the Court then went on to rule that, for a contractor to be held liable under the False Claims Act, the government must meet a “demanding” test of materiality.

Prior to Escobar, any inaccuracy relating to a “condition of payment” could give rise to False Claims Act exposure. The Escobar Court ruled, however, that the mere labeling of a representation as a condition of payment is not determinative of its materiality. As a result, under Escobar a misrepresentation of a condition of payment might not necessarily support a finding of a false claim.

The Court expressly rejected the argument that any statutory, regulatory, or contractual violation is material so long as the defendant knows the government could refuse payment were it aware of the violation. Further, the Court held that the government’s standard practice of paying or refusing claims, in light of its knowledge of certain non-compliances, can be indicative of what is or is not “material.”

Since the Escobar decision, a few appellate courts have applied the standards of the case. For example, the First Circuit Court of Appeals stated that a claim of fraudulent misrepresentation was likely not material because there was evidence CMS (the relevant federal Medicare administrative agency) continued reimbursing claims for the procedure in question despite its knowledge of certain program violations. D'Agostino v. ev3, Inc., 845 F.3d 1 (1st Cir. 2016).

Most recently, in May 2017, the Third Circuit Court of Appeals upheld the dismissal of a relator’s qui tam action because the relator failed to satisfy the materiality standard from Escobar. United States ex rel. Petratros v. Genentech Inc., 855 F.3d 481 (3d Cir. 2017). The case involved an alleged failure to disclose risks of a prescription drug, leading to more prescriptions and claims for reimbursement. If these claims were not “reasonable and necessary” as required, then they arguably violated a Medicare condition of payment.

The court rejected the relator’s theory, finding the misrepresentation was not material to the government’s payment decision, especially considering that the relator conceded the government likely would have paid the claims regardless. The court reiterated that noncompliance with a condition of payment, without more, does not establish materiality.

Now that False Claims Act liability is no longer predicated on the government’s decision to identify a particular provision as a condition of payment, it will be important to continue watching how courts apply this more demanding standard of materiality.