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June 17, 2016

How the Supreme Court just changed the definition of health care fraud

Daily Briefing

The Supreme Court on Thursday issued a unanimous ruling that could affect fraud charges brought against health care providers under the False Claims Act (FCA).

Case details

At issue in the case, Universal Health Services v. United States ex rel Escobar, was what it means for a contractor, such as a health care provider, to "knowingly" file a claim that is materially "fraudulent" or "false," thereby violating the FCA. The circuit courts had issued split rulings on the question.

In the case before the high court, the plaintiffs—the Escobar family—submitted a whistleblower suit under the FCA after their daughter reacted adversely to a medication and later died after receiving care at a Massachusetts mental health clinic.

The plaintiffs argued, under a theory known as "implied certification," that when a provider or other contractor submits a claim, it implies that the provider has complied with all applicable regulations, laws, and contract provisions. They argued that providers therefore commit fraud when they submit claims without following certain regulations, even if the government never explicitly stated that adhering to the regulations was a condition of payment and the provider did not explicitly claim to have met them.

How hospitals can prevent fraud (and address fraud allegations)

Specifically, the Escobars alleged that the clinic violated state regulations by not supervising unlicensed staff members who treated their daughter and therefore violated the FCA when it submitted a claim to Medicaid for her care.

However, the petitioner, Universal Health Services (UHS), argued that there was nothing "false" or "fraudulent" about its Medicaid claim. According to UHS, it sought payment for services it delivered, and only for services it delivered. UHS argued that the Escobars' case was an issue of compliance, not of the FCA.

The American Hospital Association, the American Medical Association, and the Pharmaceutical Research and Manufacturers of America filed amicus briefs in support of UHS in the case.

Ruling details

The Supreme Court in its 8-0 ruling held that the implied certification theory can be a basis for FCA liability in cases when an entity files a claim and "makes specific representations about its services but doesn't disclose its non-compliance with relevant laws or regulations," according to the Courthouse News Service.

Why health care fraud penalties are likely to double

The court also ruled that FCA liability is not dependent on whether adherence with laws or regulations was an explicit condition of payment.

Supreme Court Justice Clarence Thomas in the ruling wrote, "A defendant can have 'actual knowledge' that a condition is material even if the government does not expressly call it a condition of payment." He added, "What matters is not the label that 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."

However, the Supreme Court vacated a lower-court ruling that had allowed the Escobars to sue UHS under the FCA and sent that case back to the lower court.

Thomas wrote that the high court disagreed with the lower court's "expansive view 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."

Instead, Thomas said a falsehood is material only if it is serious enough that the government would withhold payment. He noted that the FCA "is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations."

According to Reuters, the justices did not rule on whether the Escobars have the legal authority to pursue an FCA suit against UHS.


Thomas Greene, an attorney for the Escobars, praised the ruling as a "great decision" for endorsing the implied certification theory. "This decision has far-reaching implications for all industries that do business with the government," he said.

Mark Pearlstein, a lawyer for UHS, praised the court for remanding the case and adopting a stricter standard of materiality. "It is significant that the court remanded to the First Circuit to reconsider the case under the new, rigorous standard of materiality stated by the Supreme Court," he said. "My client looks forward to litigating the case on remand and is confident of prevailing under the new Supreme Court standard" (Hurley, Reuters, 6/16; Lessmiller, Courthouse News Service, 6/16; Aguilar/Herman, Modern Healthcare, 6/16; Kowalczyk, Boston Globe, 6/16; Mann, SCOTUSblog, 6/16).

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