U.S. Supreme Court Says Failure to Disclose Noncompliance Can Lead to False Claims Liability

While preparing to comply with newly released final rule implementing the Protecting Access to Medicare Act’s changes to the clinical laboratory fee schedule, labs also need to heed a new U.S. Supreme Court decision that holds labs and all health care providers can face liability for False Claims Act (FCA) violations based on implied false certifications of compliance. In Universal Health Services, Inc. v. Escobar, the Court ruled the “implied false certification” theory allows FCA liability to be based upon failure to disclose a violation of a “material statutory, regulatory or contractual requirement.” Such a failure to disclose is considered to render a related claim false or fraudulent.

Noting disagreement among federal circuit courts of appeal, the U.S. Supreme Court made two important rulings in the Escobar case:

• FCA claims can be based “at least in certain circumstances” on the implied false certification theory. That is, failure to disclose noncompliance with a material statutory, regulatory or contractual requirement can give rise to FCA liability if the omission makes the claim misleading.
• Whether such an omission makes a claim fraudulent doesn’t depend on whether the requirement violated is expressly made a condition of payment but rather whether the defendant “knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

The Court’s decision arises out of a qui tam claim brought by parents of a teen girl against the facility providing her mental health services, who died following seizures after an adverse reaction to antibiotics prescribed by an individual claiming to be a doctor. The family later learned that many professionals at the facility treating their daughter were not properly qualified or licensed to perform those services or to prescribe medication. They also discovered staff were not properly supervised. The family brought a qui tam action claiming that the facility billed Medicaid for services using codes for different services than those performed and failed to disclose violations of regulations regarding staff qualifications and licensure requirements relating to the services billed. The trial court dismissed the case saying the family didn’t show the regulations violated were conditions of payment. The circuit court of appeals reversed, however, stating that a statutory, regulatory or contractual requirement can be either an express or implied condition of payment. The Supreme Court held the implied false certification theory could support FCA liability under two conditions: a claim makes representations about services or goods provided rather than just seeking payment; and failure to disclose noncompliance with requirements makes those representations “misleading half-truths.”

In defining what is material to the government’s payment decision, the court explained that something is material if it would have a tendency to influence action—in this case, government payment of claims. It stated that a misrepresentation or omission isn’t material just because the government makes the related requirement an express condition of payment. It also isn’t material simply because the government could refuse payment if it knew of the violation. Finally, a minor or insubstantial violation won’t be material. What matters most is whether the entity seeking payment knowingly violated a requirement that it knows is material to the government’s decision whether to pay the claim. Evidence that a violation is material would include if the claimant knows the government consistently refuses to pay claims because of “noncompliance with the particular statutory, regulatory, or contractual requirement.” Evidence of the government routinely paying a type of claim despite knowing of a particular violation—without expressing a change in position—would favor a finding the requirement isn’t material.

Ultimately, the U.S. Supreme Court returned this case to the lower court for review to determine whether the facts established FCA liability under the Supreme Court’s stated interpretation of the implied false certification theory.

Takeaway: The U.S. Supreme Court adds fuel to False Claims Act enforcement, recognizing an implied false certification ground for liability.