SCOTUS Decision in Escobar has Major Implications for Health Care Providers

June 16, 2016

In a unanimous decision released today in Universal Health Services v. United States ex rel. Escobar, the Supreme Court held that the implied certification theory can be a basis for liability under the False Claims Act (FCA). The Court also ruled that “[d]efendants can be liable for violating requirements even if they were not expressly designated as conditions of payment.” This ruling has major implications for health care providers facing FCA allegations by the government and whistleblowers. The Court’s analysis will also affect how health care providers’ compliance officers and counsel conduct internal investigations to self-identify overpayments received from Medicare, Medicaid, and other government payers.

Universal Health Services (UHS) operates a mental health clinic in Lawrence, Massachusetts, which receives federal and state reimbursement through the state’s Medicaid program. Julio Escobar and Carmen Correa, the qui tam relators, are the step-father and mother of a patient at the clinic who died of a seizure in 2009. The relators filed a qui tam FCA case against UHS in the District of Massachusetts, primarily alleging that caregivers at the mental health clinic were not properly supervised and that the clinic did not employ a board-certified or board-eligible psychiatrist and a licensed psychologist, in violation of state Medicaid regulations. The relators relied on the false certification theory, which states that when a defendant submits a claim, it implicitly certifies its compliance with applicable regulations.

The District Court granted UHS’ motion to dismiss, agreeing with UHS’ arguments that the regulations at issue were not conditions of payment. The First Circuit reversed, finding that when a “party submits a claim, it ‘implicitly communicate[s] that it conformed to the relevant program requirements, such that it was entitled to payment’” and held that UHS “violated Massachusetts Medicaid regulations that ‘clearly impose conditions of payment.’” The Supreme Court granted certiorari in Escobar to resolve a circuit split on the viability of the false certification theory and whether or not conditions of payment need to be expressly designated as such to be a basis for False Claims Act liability.

The Supreme Court held that the implied certification theory can be a basis for FCA liability when “two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” The Court found UHS’ claim submissions for individual therapy, family therapy, preventive medication counseling, and other types of treatment, “without disclosing [the facility’s] many violations of basic staff and licensing requirements,” to be misrepresentations giving rise to FCA liability.

The Court also held that a regulation need not be an explicit condition of payment for compliance with that regulation to be material to receiving payment. Justice Thomas wrote, “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.” In this case, the Court held, because the defendant violated mental health facility requirements that were “so central to the provision of mental health counseling that the Medicaid program would not have paid these claims had it known of these violations,” the violations may be material. The Court remanded the case to be analyzed by the lower courts under the Court’s materiality standard.

The Court’s ruling in Escobar may make it easier for the government and qui tam relators to allege FCA violations in situations where health care providers fail to meet regulations that would be material to the government’s decision to pay a claim. This analysis will be fact-intensive and dependent on the nature of the violation, the type of regulation, and the government’s knowledge of the violation. Health care providers are currently under pressure to report and return known overpayments under the 60-Day Rule, and the Escobar ruling will factor into the analysis required to determine whether or not overpayments exist.

A copy of the opinion is available here. If you have any questions about the Escobar decision, the False Claims Act, the 60-Day Rule, and how these issues impact your organization, please contact a member of Hancock Daniel’s Compliance or Fraud and Abuse teams.

The information contained in this advisory is for general educational purposes only. It is presented with the understanding that neither the author nor Hancock, Daniel & Johnson, P.C., PC, is offering any legal or other professional services. Since the law in many areas is complex and can change rapidly, this information may not apply to a given factual situation and can become outdated. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice. Under no circumstances will the author or Hancock, Daniel & Johnson, P.C., PC be liable for any direct, indirect, or consequential damages resulting from the use of this material.

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