(Story updated at 2:27 p.m. ET)
The U.S. Supreme Court unanimously issued a decision (PDF) Thursday that allows a legal theory known as “implied certification” to potentially bring more False Claims Act cases against healthcare providers.
In the case, Universal Health Services v. Escobar, the healthcare provider had argued that it and its counterparts should not be held liable for fraud if they fail to comply with regulations never explicitly stated by the government to receive payment. In essence, "implied certification" can impose liability if a contractor has engaged in a lie by omission, such as failing to disclose its noncompliance.
The court ruled that companies are subject to False Claims Act liability and the implied certification theory, but only if two conditions are met. First, claims from healthcare providers must request payment and make “specific representations about the goods or services provided,” which often is the case if providers use standard Medicare and Medicaid billing forms. Second, an organization's failure to disclose noncompliance with “material” requirements would equate to “misleading half-truths.”
The outcome of the case could affect a number of industries, but the biggest impact could be on healthcare players. In 2015, two-thirds of federal whistle-blower lawsuits targeted healthcare entities. Implied certification is the basis of many suits brought against providers, and the federal circuit courts have been split on whether it should be allowed.
Several experts viewed the decision as a way to strike a balance between combating healthcare fraud and protecting companies from what could be viewed as limitless False Claims Act cases.
“The court did not create a standard that is a simple, straightforward algorithm that could easily be applied to reach a clear outcome in every case,” said Kirsten Mayer, a partner at Ropes & Gray who defends healthcare clients in False Claims Act cases. “But the court did set some important categorical requirements that will not change from case to case.”
David Nadler, chairman of the government contracts practice at Blank Rome, said that “the subjective nature of the court's ruling is not likely to reduce the avalanche of False Claims Act cases because these issues are intensely factual and not likely to be dismissed early in the case.”
The case goes back to a teenager who received psychiatric care at Arbour Counseling Services, a subsidiary of for-profit hospital chain Universal Health Services. The patient, who was a Medicaid enrollee in Massachusetts, died in 2009 due to adverse reaction to a drug.
It was later discovered that Arbour, which billed the Medicaid program for services provided, had very few doctors and clinicians who were licensed to provide mental healthcare. There was almost no supervision of the unlicensed staff, who counseled patients and prescribed drugs anyway—a clear violation of state and federal standards.
The Supreme Court remanded the case—which was fought heavily by hospitals, drug companies and medical groups—back to the appeals court. But the justices gave credence to the implied certification theory, meaning that hospitals and other healthcare organizations could be on the hook for False Claims Act penalties if they violate some Medicare and Medicaid rules that aren't related to conditions of payment.
“It is going to increase liability in FCA for healthcare providers,” said John Petrelli, a partner at BakerHostetler. “But it has increased scrutiny into some of those cases with the materiality standard.”
Justice Clarence Thomas, who wrote the opinion, stated that there is a “rigorous” and “demanding” process for determining alleged misconduct. There is an element of common sense in these cases, but justices also made it clear the False Claims Act cannot be used as “a vehicle for punishing garden-variety breaches of contract or regulatory violations.”
Healthcare providers have to comply with what they say is a morass of regulations, and the ruling “clarifies for both sides of these cases the level of materiality that has to be shown before False Claims Act liability can be imposed,” said Jason Drori, an attorney at Foley and Lardner who represents healthcare companies in False Claims Act cases.
Brian Markovitz, an attorney at Joseph, Greenwald & Laake who represents whistle-blowers, supported the Supreme Court's decision in a statement. He said it's "impractical" to tie False Claims Act lawsuits only to explicit conditions of payment to providers.
"One couldn't seriously argue with a straight face that the government must expressly write in each contract or in every government program every possible scenario in which they could be defrauded," he said.